Arqit drops plan to operate quantum encryption satellites

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TAMPA, Fla. — British cybersecurity software developer Arqit is looking to sell a partly built satellite after scrapping plans for a space-based quantum encryption network.

Arqit said Dec. 14 it no longer needs satellites to deliver encryption keys that can resist attacks from quantum computers.

Instead, the company said it has developed a terrestrial distribution method that enables symmetric key cryptography without the risk and costs of building out a quantum communications network in space.

“The security of encryption keys created on the end points [such as customer devices and data centers] using our lightweight software agent is as strong with a terrestrial method as with the satellite method,” Arqit founder and CEO David Williams said during the company’s Dec. 14 earnings call.

The decision does not affect the construction of a satellite that Qinetiq is currently building under a contract partly funded by the European Space Agency.

SEC probe

The strategy pivot came as Arqit disclosed that the U.S. Securities and Exchange Commission is investigating its merger with Centricus Acquisition, a special purpose acquisition company (SPAC) that catapulted the startup to the NASDAQ stock exchange in September 2021. 

Arqit said in a regulatory filing that it is cooperating with the investigation, including by voluntarily producing documents.

“The SEC has informed Arqit that this is a fact-finding inquiry,” the company said without providing additional details.

Arqit recorded revenue for its fiscal year to the end of September that is lower than it projected in August 2021, during an investor presentation a month before the SPAC merger to attract investor interest.

The company launched commercial operations this year and recorded $7.2 million in revenue for its fiscal year 2022, or $20 million when including other income, including funds from ESA.

In the August 2021 presentation, Arqit said it expected to generate $14 million in revenue for the 2021 calendar year, and $32 million in 2022.

The company’s ESA contract was recently reclassified as other income in Arqit’s accounts, instead of revenue, partly because the company does not consider this work to be its primary output.

Arqit said in a regulatory filing that it is also aware of a putative class action lawsuit against the company, filed in early May, which alleges “materially false and misleading statements relating to Arqit’s business prospects and projections.” 

While Arqit said it has not been served the complaint, and has no knowledge about whether the lawsuit will proceed, it “intends to vigorously defend against these claims” if necessary.

SPACs offer companies a fast-track to the public markets without the level of due diligence that accompanies traditional stock market listings, enabling them to make optimistic growth projections to garner investor support.

The popularity of SPACs among space and other companies has been declining amid stricter regulations, weakening economic conditions, and the poor stock performance of post-SPAC companies.

Arqit’s satellite pivot

Arqit said there is still demand for quantum encryption satellites, including from government defense departments looking to avoid sending data traffic across international cables. 

Instead of building its own satellites, Arqit intends to license the technology it has developed for them to other organizations. 

There are discussions with “a number of potential customers” to buy the satellite that is currently under construction, according to Arqit, and for licenses to use its quantum satellite intellectual property.

Arqit had previously lined up Virgin Orbit, which had invested in the company’s SPAC deal, to launch the satellite in 2023.

“Through innovation we have simplified our technology and removed significant future capital expenditures,” Williams added.

Arqit recently announced customer contracts with cybersecurity firm Fortinet, computer developer Dell Technologies, and cloud giant Amazon Web Services to use its security software. 

The company’s shares closed at $5.15 Dec. 14, down 17% from the day before, after falling from a high of $37.41 in December 2021.