Wisekey International Holding S.A. annual report, Q4 FY2019

Business Context and Reporting Period

WISeKey International Holding AG is a Swiss cybersecurity company focused on secure semiconductors, managed public key infrastructure, digital identities, and Internet of Things security. This Form 20-F covers the fiscal year ended December 31, 2019. Financial statements are prepared under U.S. GAAP in U.S. dollars.

WISeKey completed the sale of its QuoVadis Group to DigiCert in early 2019 for stated consideration of USD 45.0 million, excluding the retained ISTANA platform. QuoVadis is presented as a discontinued operation. The company’s ADSs began trading on Nasdaq under WKEY on December 4, 2019; each ADS represents five Class B shares.

Key Financial Metrics

USD millions, except per-share data	2019	2018	Change
Continuing-operations revenue	22.7	34.3	-34%
Gross profit	9.5	16.0	-41%
Gross margin	42%	47%	-5 percentage points
Operating loss	(20.5)	(9.1)	Loss increased
Net loss from continuing operations	(23.0)	(9.9)	Loss increased
Income from discontinued operations	30.5	(6.4)	Favorable disposal impact
Net income	7.5	(16.3)	Turned profitable
Net income attributable to WISeKey	8.2	(16.3)	Turned profitable
Basic EPS attributable to WISeKey	USD 0.23	USD (0.48)	Improved
Adjusted EBITDA	(12.6)	(2.7)	Worsened

Revenue consisted primarily of USD 20.5 million from the IoT segment, down 30%, and USD 2.1 million from the mPKI segment, down 56%. North America represented 43% of continuing-operations revenue, Rest of EMEA 36%, Asia Pacific 11%, Switzerland 9%, and Latin America 1%.

• Research and development expense was USD 6.4 million, up 21%.
• Selling and marketing expense was USD 7.9 million, up 37%.
• General and administrative expense was USD 15.8 million, up 11%.
• Stock-based compensation increased to USD 5.4 million from USD 1.7 million.
• Goodwill was USD 8.3 million and acquired technology and other intangible assets were USD 0.6 million; no goodwill impairment was recorded.

Cash Flow, Liquidity and Debt

• Net cash used in operating activities was USD 13.9 million, compared with USD 8.5 million used in 2018.
• Net cash provided by investing activities was USD 36.6 million, principally reflecting the QuoVadis divestiture.
• Net cash used in financing activities was USD 17.3 million, primarily due to repayment of the ExWorks line of credit.
• Cash and cash equivalents were USD 12.1 million; current and noncurrent restricted cash totaled USD 4.5 million, producing total cash and restricted cash of USD 16.6 million.
• Total liabilities were USD 29.5 million, down from USD 74.5 million, while shareholders’ equity increased to USD 20.4 million from USD 4.0 million.
• Current notes payable were approximately USD 4.1 million, and current convertible notes were USD 3.2 million. The filing reports no long-term notes payable at year-end.
• Outstanding borrowings included approximately USD 4.0 million under an ExWorks loan to WISeCoin, USD 2.3 million under the Yorkville convertible loan, and USD 1.2 million under the Crede convertible loan.
• Management projected approximately USD 2.1 million of cash needs for operations and financial commitments through March 31, 2021, after considering financing availability and a subsequent Yorkville financing.

Material Changes Versus the Prior Comparable Period

• Revenue fell 34%, driven by the QuoVadis divestiture and reduced cross-selling, semiconductor-industry weakness related partly to U.S.-China trade tensions, and the end-of-life cycle of an older MicroPass product.
• Gross margin declined from 47% to 42%, reflecting excess inventory and reduced orders, new-product introduction costs, and a lower mix of higher-margin mPKI revenue. Management reported improvement from 39% in the first half to 45% in the second half of 2019.
• Operating loss more than doubled as lower gross profit combined with higher R&D, selling and marketing, administrative, and stock-based compensation expenses.
• The reported net profit was not operationally generated: it primarily reflected a USD 31.1 million gain on disposal of QuoVadis. Continuing operations remained substantially loss-making.
• The company adopted ASC 842 lease accounting in 2019 using a transition approach that did not restate 2018 or 2017. Right-of-use assets and lease liabilities were recognized, with no material effect on 2019 operating results.
• Headcount declined to 84 employees from 154 at December 31, 2018, supplemented by 18 independent contractors in Vietnam.

Guidance, Outlook, Commentary and Risks

Management’s strategy is to refocus on IoT security, expand its integrated semiconductor and cybersecurity platform, cross-sell to its customer base, expand geographically, develop blockchain and artificial-intelligence applications, and pursue selective acquisitions. The filing does not provide formal revenue or earnings guidance.

• Management states that the IoT business remains sensitive to semiconductor-sector conditions, customer inventory levels, product life cycles, and U.S.-China trade and geopolitical tensions.
• The company has a history of operating losses and states that 2019 was its first profitable year since inception only because of the QuoVadis disposal. Adjusted EBITDA remained negative at USD 12.6 million.
• Liquidity depends on cash generated from customers, equity facilities, convertible debt, and other financing. The GEM facility had CHF 56.1 million available and the Yorkville SEDA had CHF 47.1 million available at year-end, but use of these facilities may substantially dilute shareholders.
• The LSI convertible facility provided up to CHF 30.0 million, none of which had been drawn at year-end. Conversion features and other financings could materially increase the number of Class B shares outstanding.
• Key risks include cybersecurity breaches, product defects, rapidly changing technology, intense competition, semiconductor supply disruptions, customer concentration, foreign-exchange exposure, intellectual-property claims, regulatory and data-protection compliance, and inability to achieve sustainable profitability.
• The company relies on a perpetual but conditionally terminable license from OISTE for the cryptographic Root of Trust used in its business. Certain WISeKey directors also serve on the OISTE foundation board.
• A former employee brought a breach-of-contract claim in 2019; management did not expect a significant financial effect. The filing states that no other material legal proceedings were known.
• Subsequent events included a USD 1.7 million net cash inflow from a new Yorkville convertible loan, a USD 2.5 million release from escrow, additional share issuances and conversions, expansion of the ADS share-buyback program, and extension of the SEDA to March 31, 2023.

Most Important Facts for Investors to Verify

• Whether continuing operations can reach positive operating cash flow without recurring equity or convertible-debt financing.
• The extent to which the USD 2019 net profit is attributable solely to the QuoVadis disposal rather than ongoing business performance.
• Current balances, maturities, repayment terms, security, and conversion mechanics of the ExWorks, Yorkville, Crede, and LSI facilities.
• Potential dilution from the GEM facility, Yorkville SEDA, conditional capital, employee options, warrants, and convertible loans.
• Progress in replacing declining legacy semiconductor revenue and rebuilding mPKI revenue after the QuoVadis sale.
• The collectability and timing of restricted cash, tax credits, receivables, and the USD 7.0 million Tarmin warrant investment.
• Whether goodwill and other intangible assets remain recoverable if IoT revenue or margins deteriorate.
• Governance implications of the dual-class structure, including Carlos Moreira’s approximately 58% voting power and the company’s reliance on Swiss-law and foreign-private-issuer exemptions.