Oddball! This company's quantum satellite project ended before it even took to the skies
This week, UK-based quantum crypto company Arqit (NASDAQ: ARQQ) announced results for its last fiscal year, reporting approximately $20 million in revenue for the fiscal year ending September 30, 2022, with $7.2 million coming from five contracts for its flagship product QuantumCloud and other revenue including $12.8 million from the European Space Agency million in project contract revenue.
At the same time, a big upset occurred when Arqit terminated its long-planned quantum satellite project, which was its main selling point when it went public. In the last five trading days, Arqit's shares have fallen by more than 30%.
Finally, the company disclosed that the Securities and Exchange Commission (SEC) is conducting a fact-finding investigation into Arqit's SPAC merger with Centricus Acquisition Corp, and the company is cooperating with the investigation.
Arqit says in its announcement that as part of the backend technology that supports the operation of Arqit's software agents, identical sets of random numbers ("replica entropy") must be transmitted securely and frequently to data centers. arqit has invented a quantum satellite protocol to support the delivery of replica entropy, which it believes is a unique way to achieve quantum-safe It believes that this is a unique way to achieve quantum-safe transmission. However, until the satellite launch, Arqit had been using a terrestrial approach using a classical set of digital hardware and software elements (non-quantum communications) to deliver replica entropy and, after further innovations this year, recently deployed an advanced version of terrestrial delivery. The security of the endpoint encryption key is as strong when using the terrestrial method as when using the satellite method. As a result, Arqit has concluded that providing quantum security products no longer requires the incorporation of satellites or associated terrestrial infrastructure into its core QuantumCloud product [1].
Arqit intends to sell its quantum satellites currently under construction to a customer with ultra-security requirements.Arqit is no longer building satellite infrastructure and intends to license its quantum satellite IP to follow-on customers with similar requirements, which will allow these customers to build their own systems.Arqit has indicated that it is currently in discussions with a number of potential customers regarding the purchase of its existing satellites and quantum satellite Intellectual property (IP) licensing discussions are underway with a number of potential customers regarding the purchase of their existing satellites and quantum satellite IP licenses.
Arqit expects that these changes in its technology strategy will have a positive impact on its future results, recovering a portion of its capitalized satellite costs through a planned sale.
Although the history of quantum satellite development is very short, but at present the global public quantum satellite project is close to 20, stopping the project in the middle is really unheard of. This raises many questions.
According to Arqit, its satellite and ground protocols were in place at its inception, so did it not assess the need for quantum satellites at that time? Even a ground-based approach alone could meet the needs of its current products, but what about the future? Wouldn't satellites be needed even for longer transmission distances?
And its technology itself has many unanswered questions. there are currently two main approaches to quantum security, quantum key distribution (QKD) and quantum resistant cryptography (PQC). arqit explicitly states that their technology is not QKD, but never says it is PQC either. so it is not clear which category arqit's technology falls into.
On April 18 of this year, the Wall Street Journal published an article titled "Former Employees and Outsiders Say UK Crypto Startup Arqit Exaggerates Its Prospects". "Arqit's flagship product is an early prototype that can't encrypt anything in real-world applications ......"
To counter this article, Arqit invited the University of Surrey in the UK in May to independently qualify its technology for implementing symmetric key protocols. The report confirmed the security proof of Arqit's client-side symmetric key agreement software, creating zero-trust and computationally secure keys. But a look at Arqit's published report shows only conclusive text throughout, with little technical detail.
Even if we believe this qualification report, this only verifies the security of key generation, and for key transmission, whether via ground or satellite, Arqit provides no proof of security.
The future of the G7's Federal Quantum System (FQS), which was announced at the G7 summit last June when the leaders announced the joint development of a satellite-based quantum secrecy network, largely powered by Arqit, is also unknown, and the first FQS satellite was expected to be launched in the UK in 2023.
02Revenues below promises, under investigation by SEC
For the fiscal year ended September 30, 2022, Arqit generated approximately $20 million in revenue, of which $7.2 million came from five contracts to use QuantumCloud and other revenue included $12.8 million in project contract revenue from the European Space Agency. The operating loss for the fiscal year was $52.1 million and administrative expenses were $72.2 million [2].
Arqit said it received $12.8 million from the European Space Agency in fiscal year 2022 and classified it as "other operating income" rather than revenue. The company said it is not considered revenue in part because Arqit's satellite design work with the agency is not a "major output" for the company.
Arqit also announced that "Arqit is cooperating with the SEC's investigation of the merger between Arqit and Centricus Acquisition Corp. including through voluntary filings," Arqit said, adding that the SEC informed it that it was "a factual investigation."
While it's impossible to link the two events together for the moment, the fact is that Arqit's performance is below its initial promises. In a 2021 presentation to investors, Arqit CEO David Williams said the company has $130 million in committed revenue contracts and expects to earn $14 million in 2021 and $32 million in 2022.
The ongoing controversy since Arqit's IPO is certainly related to its listing through a special purpose acquisition company (SPAC), which provides companies with fast-track access to the public markets without the due diligence required for a traditional stock market listing, allowing them to make optimistic growth projections to gain investor support. However, the popularity of SPACs has been declining as regulations have become stricter, economic conditions have weakened, and SPAC companies' stocks have underperformed.
Reference Links：
[1]https://arqit-res.cloudinary.com/image/upload/v1671023098/Press/Arqit_-_Technology_update_g8ruxc.pdf
[2]https://arqit-res.cloudinary.com/image/upload/v1671030493/Press/Arqit_Quantum_Inc._Announces_Financial_t5p9gj.pdf
