QNC Due DiligenceCompany Overview In August 2016, Active Growth Capital (a capital pooling company on the TSXV) acquired the Quantum Random Number Generator (QRNG) tech and pending patents from Bertrand Reulet, his associates, and SOCPRA. Reulet’s research showed they could build a device which would produce true random numbers by measuring the current of electrons randomly tunnelling across a quantum tunnelling barrier; the tunnelled charges generate a low-level random electrical noise which can be filtered, amplified and sampled for obtaining random numbers from a quantum source. This process is described in both their patents and corporate presentation.
The newly formed entity was named Quantum Numbers Corp. (now Quantum eMotion). At the time the tech was a product of Dr. Reulet’s research at Sherbrooke University; he is an extremely decorated physicist in the field of non-Gaussian noise, serves as the Canadian Research Chair in Quantum Microwave Radiation, and continues to serve as the CTO of QNC today. The links below contain more information about him and the combining transaction.
https://www.usherbrooke.ca/iq/en/personne/bertrand-reulet/ https://www.chairs-chaires.gc.ca/chairholders-titulaires/profile-eng.aspx?profileId=3865 https://www.globenewswire.com/en/news-release/2016/08/04/1093192/0/en/Active-Growth-Capital-Enters-Into-Definitive-Agreement-for-Proposed-Change-of-Business-and-Closes-Bridge-Financing.html The CEO of the newly formed QNC at the time, Pierre Miron, and the rest of the management team undertook a search for a new CEO. This resulted in the hiring of Jean Charles Phaneuf and shifting of Pierre to CFO and the ousting of Patrick Power. Jean Charles was brought in for his past experience with tech firms, and especially for his experience in selling various tech firms (iScope sale to Colet, UForce sale to 8x8). The following news release contains more information.
https://www.quantumemotion.com/investors/news-releases/quantum-numbers-corp-announces-appointment-new-president-ceo-grant-options/ JCP and the team at the time did a fantastic job building the patent portfolio QNC boasts today; by November 2019, they had secured all the necessary patents for the firm’s QRNG and the associated validation technology in the US and Europe. To provide some context, they have two main patent families: one regarding their QRNG, and the other relates to their tech which quantifies the randomness of their signal. Their patents were also granted in Russia and Australia, and they have ongoing applications in various countries such as Canada, Brazil, India, China, Thailand, Japan, Indonesia, and Korea. The US and EU patents are the gold standard and give a green light to management to pursue commercialization of the product.
Management consistently attended some of the world’s largest tech conferences (CES, etc.) to market the product but without granted patents at the time nor a functional prototype, they always ran into dead ends. In summary, based on recollections from both past and present board members, Jean Charles was a “slugger without a bat”. He was brought in to build our patent portfolio, market the company, secure some clients/partners, and sell it – but without a working prototype it was impossible to achieve the final steps. From a trusted source within the company: in late 2019 the company was in the final innings of securing a deal with the Canadian military, but when this deal fell through JCP had no choice but to step down – there was no further value he could add to QNC. Rumblings of a potential deal sent the stock from $0.10 to north of $0.24 in a short period of time but it collapsed to $0.08 after it was learned the deal fell through. JCP stepped down July 2020. Marc Rousseau, who served in the military and is the root of the firm’s military connections, assumed the role of CEO.
Since inception the company held firm on their promise to avoid subjecting their shareholders to dilutive financings, but QNC was strapped for cash – they had almost nothing left in the bank by the end of 2020. The firm hoped to raise the share price by releasing promising news on their prototype, namely they had resolved some technical issues which were preventing it from commencing their CMOS chip implementation. This news popped the price very briefly, but it fell back to the $0.05 floor shortly thereafter – the only news investors welcomed at the time would be a deal, because they needed cash s0 badly. To avoid bankruptcy the company was left with the choices of either accepting a buyout or finally diluting via share offering (private placement). Fortunately, they opted for the latter and, in doing so, brought in the new CEO, Francis Bellido.
The offering was done at $0.05 per unit with an attached warrant exercisable at $0.15. Management was very selective with which investors they permitted to participate; they wanted trusted investors who would not immediately dump their shares after the holding period ended. Prior to this offering, investors were very displeased with management’s lack of insider ownership (they consistently stated they were barred from trading shares due to blackout periods / possession of insider info). With Bellido’s appointment, the entire management team participated in the offering. Some have also exercised options and we are awaiting word on whether they will exercise their warrants after the upcoming presentation on November 18. Investors were very excited with Bellido’s appointment given his plethora of experience founding and leading life sciences businesses. He also went on to run his own life sciences investment fund ($300M SGF-Sante). The associated new release can be found below:
https://www.globenewswire.com/en/news-release/2021/01/18/2159958/0/en/Quantum-Announces-Appointment-of-Francis-Bellido-as-CEO.html Given his background it was believed healthcare would be a vertical pursued by QNC, but this is no longer a primary objective. In February, the firm announced our accelerated Go-To-Market plan which would involve development of our first QRNG product on a USB designed to target blockchain and data center customers. Through their partnership with Syntronic (announced June 17
th) this USB will be revealed during the November 18 presentation, which was set up to encourage warrant holders to exercise their warrants so QNC can raise some cash. The CMOS chip prototype is also under development and completion is expected Summer 2022 (one year ahead of schedule). Other recent developments include: i) the hiring of various board members, namely Scott Rickards in March (experience with Hedge Funds, PE/VC firms) and Wayne Teeple in July (experience in Telecom and Canadian Military); ii) received a third-party valuation of their patent portfolio in April with an upper value of $3.4B; iii) in response to my concerns, they released a document supporting the $3.4B valuation (which was still insufficient, in my opinion), iv) confirmed the name change from Quantum Numbers Corp. to Quantum eMotion in June; v) Director Luc Paquet’s resignation in August; vi) joined Quantum Alliance Initiative in August which was established by the Hudson Institute; vii) commenced trading on the OTCQB in September; and viii) secured the FTDI chip November 10 which was needed for completing their USB product (previously delayed due to supply shortage), and announced November 18 presentation for a business update / product reveal. The firm has also been pounding the pavement in getting QNC’s name out there; most notably, a Forbes article was written on the company.
Encryption, Rising Cybersecurity Threats, and Quantum Computing On a high level, encryption works as follows: plaintext data is encrypted by a key which ‘jumbles’ the data rendering it unreadable as ciphertext, which is then decrypted back into plaintext for the receiver. These ‘keys’ are random strings of bits made for encrypting/decrypting data, and these ‘random’ strings of bits are made by algorithms. The best example and one of the most common forms of encryption is RSA (2048 bit). A message from any sender can be encrypted by the public key, which is the multiple of two prime numbers, but messages can only be decoded by receivers with the prime numbers. Common factoring was easy in middle school, but the number in this case is 2,048 bits, or 617 decimal digits (a number with 617 digits). To crack this code, it would take a classical supercomputer about 300 trillion years but a formidable* quantum computer using Shor’s algorithm (discovered in 1994) could break it in a few hours (or less depending on the advancements we achieve in the future). Quantum Computing, in and of itself, is an entirely separate discussion, but all one needs to know is it will pose real threats to the world and it is coming faster than expected.
*Originally it was believed a 1 billion qubit computer was needed, but now experts believe a 20 million qubit computer will suffice – who knows how often and to what extent this number will change, hence the vague use of the adjective ‘formidable’
Cybersecurity firms generate the pseudo-random numbers needed for making keys in encryption. I precede the word random with ‘pseudo’ since their pseudo-random number generators use algorithms bound by classical computing and thus classical physics. These algorithms, by definition, follow a classical pre-determined process and set of rules to produce numbers. Thus, the numbers being output follow the same deterministic processes which, once unveiled by a hacker, renders the encryption useless. Modern firms have combatted this issue by adding levels of randomness from physical/natural events such as fluctuations in temperature and humidity. Cloudflare, for example, uses images of lava lamps to generate their random numbers (which has worked so far, as their stock has done pretty well over the last 5 years and they trade at 37x FY2021E Revenues). However, these physical sources are not only slow but they are also, again, bound by the laws of classical physics and are not inherently random. Therefore, flaws can be unveiled and their measurements can be determined by a worthy opponent / hacker.
What is the solution? Quantum Random Number Generators (QRNGs). First created by IDQuantique (50% stake acquired by SK Telecom in 2018 for $65M) in 2001 and theorized years/decades earlier, QRNGs take advantage of quantum phenomena which are inherently random to generate true random numbers. QNC’s QRNG, like those of their competitors, use quantum tunneling; charges, be they negatively-charged electrons or positively-charged ‘holes’, randomly ‘tunnel’ across a quantum tunneling barrier. In quantum mechanics subatomic particles behave as both a particle and a wave (wave-particle duality); when solely regarded as a particle, electrons would not be able to pass a potential barrier (i.e., 5V) without sufficient energy, but in quantum mechanics at the subatomic level the electron exists as a wave – rather, the wave represents a range of probabilities related to the location of the electron. When placed at a potential barrier there exists a relatively low range of probabilities in which the electron exists beyond the potential barrier, thus it is therefore able to ‘tunnel’ through. These tunneled charges generate a low-level random electrical ‘noise’ (shot noise) which can be filtered out from ‘thermal’ or Johnson-Nyquist noise (which is not random and must not influence the signal). The shot noise is amplified and sampled for obtaining random numbers. This is a truly random quantum process exempt from any deterministic elements. I recommend consulting the link below and QNC’s patent descriptions to better understand this proven process, as well as the graphic provided in QNC’s corporate presentation.
https://www.chemistryworld.com/news/explainer-what-is-quantum-tunnelling/4012210.article https://patents.google.com/patent/EP3140818A1/en?oq=quantum+numbers+corp QNC’s Revolutionary Technology and Applications If this technology has been around for decades, why isn’t it being used in every device around the world and what makes QNC’s technology so special? Competitors’ QRNGs are i) far slower, ii) much larger, iii) photon-dependent, and iv) very expensive, and QNC is the only publicy-traded pureplay QRNG stock in the world – if an investor wants exposure to this market, they will need to buy QNC. QNC will revolutionize the QRNG market with their own product being revealed November 18. In its full form it will operate at speeds in excess of 1Gbps, fit on a chip 2microns x 2microns in size, and most importantly it uses electrons rather than photons in the tunneling process which means it can run in parallel on devices without impacting operational performance – all at a fraction of the cost. It was learned through conversations with the CEO that “costs per unit are not expected to exceed $10-20 at scale” and gross margins will be well north of 90%. The product being revealed on Thursday is in USB form, and as discussed by the CEO our current low hanging fruit are blockchain and cryptocurrency applications. Regarding the CMOS chip, we should have the working prototype ready for development by Summer 2022 (a full year ahead of previous expectations). Our technology is superior on all fronts and our robust patent portfolio, which the CEO intends to build upon as we expand into new verticals, provides the necessary protection to dominate the market through 2035.
It is expected the firm will also go after VPNs and cryptowallets, specifically. Another direct quote from management: “If you have a piece of tech which increases the efficiency of the blockchain while maintaining its security, you can sell this tech for a very high price… We would essentially be proposing a new architecture of the blockchain”. Cryptowallet encryption is protected by pseudo-random numbers, and with a capable Quantum Computer or advanced hack attack every wallet on earth could be compromised – this would collapse the entire market for cryptocurrencies. TripleA estimates the number of cryptocurrency users, and thus the number of cryptowallets, is in the ballpark of 300M. Regarding VPNs, Dataprot estimates 31% of internet users worldwide have used a VPN service as well as enterprises which provide secure networks for their employees (the remote work revolution has boosted demand for enterprise VPN services). Our USB product being released November 18 is sufficient to pursue clients in these markets and other lower priority verticals such as healthcare and data centers, but release of the CMOS chip will greatly widen the firm’s horizons. By the numbers: over 7.2M data centers worldwide, over 1.5B vehicles worldwide, more than 15B mobile devices around the world, and 21.5B interconnected devices (IoT devices), etc. All IoT devices require end-to-end communication security thus at full scale the Total Addressable Market for QNC will exceed dozens of billions of devices. I personally would not feel safe stepping into a driverless car unless it was protected by some sort of QRNG technology; without this protection, hackers could turn our Punch Buggies into Decepticons. The opportunities are endless but would require excessive scale which is why an exit for sale holders is not only desired but necessary for the firm’s long-term growth prospects.
The allure of QNC is that risks posed by quantum computing need not even materialize for the firm to deliver value. The rise of AI and 5G combined with general advancements made by hackers and the growing threat of state sponsored attacks have created an extremely unsafe cyber environment which becomes more vulnerable as each day passes. Innovation related to build up our encryption has lagged innovations designed for malice. Further, the tendency of both governments and corporations to adopt reactive approaches rather than proactive approaches continue to provide plenty of easy targets for hackers. Random number generation which can be provided in fast, cheap, efficient manner on a small scale is something that will be in demand regardless of quantum computing’s inevitable rise. QNC’s product delivers a superior value proposition on all fronts with industry leading speeds (>1Gbps), the potential to operate on a 2micron x 2micron size chip (smaller than all competitors’ products), and manufacturing costs of $10-20 per unit – the product is also complemented by our robust IP and connected leadership team.
Competitors Below are the competitors listed in the company’s corporate presentation:
If QNC is indeed able to produce our units for $10-20 each, taking the lowest price from these comparables (~$1000) would yield 98-99% gross margins. Even at a 50% discount ($500), QNC would become a cash flow machine with gross margins north of 95%.
Valuation More thorough valuations will be undertaken after the November 18th presentation and with better numbers from management (sales forecasts, pricing, etc.). Lack of forecasts/figures and a nonexistent set of publicly traded comparable peers will make the valuation difficult to construct, but it is doable. Our closest proxy peers are publicly traded cybersecurity firms.
Currently, large cybersecurity firms trade at ~8x-12x Forward Revenue and 25x-30x Forward EBITDA, and the buyout multiples are even higher. Management has been very clear in stating an exit for shareholders is the end goal and the stock should be valued accordingly.
For some reason stock discussion boards are fixated on reaching ‘dollar land’; a $1 buyout price for QNC would be an insult as the patent portfolio alone could be worth hundreds of millions of dollars (if not more - see report on ~$2.5B valuation of firm’s IP by evaluator). If the company were to be bought out at $1, with 150M shares outstanding (they currently have 110M but let’s assume they do a 40M share raise at $0.50), the implied equity value of $150M at a buyout revenue multiple of 12x would require LTM sales of about $12.5M. At $2, using the same 12x buyout revenue multiple QNC would need LTM sales of about $25M. At $3, $37.5M LTM Sales. At $4, $50M LTM Sales, etc.
One could also make the case that QNC’s sky-high margins would yield superior EBTIDA margins (assume 60%, arbitrarily), thus higher buyout multiples would be demanded with lower LTM sales to yield the same exit price. Refer to the table below for an illustrative valuation summary.
Investment Summary QNC’s QRNG technology is unmatched and superior to competitors’ products in every way. With the QRNG market set to reach $14B by 2030, representing a CAGR of 60%, we are at a turning point in the history of cybersecurity and QNC will be entering/leading the industry at the most opportune time. The potential verticals for our product are endless and our Total Addressable Market is in the range of billions of dollars. At some point in the future, every car, cellphone, cryptowallet, datacenter, critical infrastructure, and developed enterprise on the planet will require some sort of QNRG technology. Management will continue to work tirelessly in keeping our product development/rollouts on schedule. With our robust IP portfolio, growing marketing outreach, and qualified management team, it is not a question of it but rather when we sign our first clients. Currently, the stock trades at $0.25 on the TSXV (market cap of ~$25M) which is an extreme discount to the potential value of the company. It is believed management intends to do another offering at $0.50, and as seen in the run it had in Aug.-Sep. 2021 with favorable news and adequate marketing, this price target is easily attainable – the SP should be trading at $0.50, if not more, right now. If all things go well on the production front (i.e., successful USB release and CMOS development), eventually an exit price north of $3/share should not come as a surprise.
I have owned the stock since 2017 and will continue to buy on dips until we are bought out.
Best,
The Penny Professor
*Disclaimer: not financial advice
PS: Unfortunately, I cannot post images on here - consult reddit or Discord for the full post.