WISeKey International (WKEY) - 2019 Q4 - Annual Report

Report Cover Page This document is an Annual Report on Form 20-F for the fiscal year ended December 31, 2019 - This document is an Annual Report on Form 20-F for the fiscal year ended December 31, 2019, filed by WISeKey International Holding AG[2][3] - The company's American Depositary Shares (ADSs) are registered on The Nasdaq Stock Market LLC under the trading symbol WKEY[6] - As of the report date, the company had 40,021,988 Class A Shares and 27,621,895 Class B Shares outstanding[7] - The company is classified as an Emerging Growth Company[8] Preliminary Statements Introduction and Use of Certain Terms WISeKey, a security technology holding company, listed its Class B Shares on SIX in 2016 and ADSs on NASDAQ in 2019 - The company's ADSs, each representing five Class B Shares, have been listed on NASDAQ under the symbol "WKEY" since December 4, 2019[15] Special Note Regarding Forward-Looking Statements This report contains forward-looking statements subject to risks and uncertainties detailed in the Risk Factors section - The report includes forward-looking statements regarding growth strategies, profitability, customer attraction, and product development[18][21] - Investors are cautioned not to place undue reliance on these forward-looking statements as they are subject to significant risks and uncertainties detailed in "Item 3D. Risk Factors"[19] Part I Item 3. Key Information This section presents key financial data for 2017-2019 and outlines significant business risks, including competition and dilution A. Selected Financial Data Selected consolidated financial data for 2017-2019 shows a 2019 net income driven by discontinued operations gain | USD'000 (except earnings per share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net sales | 22,652 | 34,280 | 33,674 | | Operating income / (loss) | (20,504) | (9,060) | (7,869) | | Income/ (loss) from continuing operations, net | (23,030) | (9,908) | (10,126) | | Income / (loss) on discontinued operations | 30,484 | (6,357) | (14,624) | | Net income / (loss) | 7,454 | (16,265) | (24,750) | | Net income / (loss) attributable to WISeKey | 8,187 | (16,278) | (24,267) | | Basic Earning per share (USD) | 0.23 | (0.48) | (0.82) | | USD'000 | As at Dec 31, 2019 | As at Dec 31, 2018 | As at Dec 31, 2017 | | :--- | :--- | :--- | :--- | | Total current assets | 23,584 | 32,118 | 26,071 | | TOTAL ASSETS | 49,904 | 78,453 | 67,156 | | Total current liabilities | 20,150 | 34,875 | 23,716 | | TOTAL LIABILITIES | 29,460 | 74,478 | 53,550 | | Total shareholders' equity | 20,444 | 3,975 | 8,726 | - The company adopted the new lease accounting standard ASC 842 as of January 1, 2019, making 2019 financial data not directly comparable to prior years prepared under ASC 840[25][27][28] D. Risk Factors The company faces significant business, financial, legal, and share-related risks, including intense competition and dilution - The company faces intense competition from larger, better-known global security companies such as VeriSign, DigiCert, NXP Semiconductors, and STMicroelectronics, which have greater financial resources and name recognition[39][40][41] - WISeKey has a history of losses, with 2019 being its first profitable year, driven by a $31.1 million gain on the disposal of a business, and an accumulated deficit of $189.2 million as of December 31, 2019[73] - The company has multiple financing agreements, including a Share Subscription Facility (SFF) with GEM, a Standby Equity Distribution Agreement (SEDA) with Yorkville, and several convertible loans, which could lead to substantial issuance of new shares and dilute existing shareholders' interests[84][87][88] - As a foreign private issuer and an emerging growth company, WISeKey is exempt from certain NASDAQ corporate governance and SEC disclosure requirements applicable to U.S. domestic companies, which may afford less protection to shareholders[120][123][125] - The company's founder, Carlos Moreira, holds over 50% of the company's voting rights, giving him significant influence over corporate matters, including the election of directors[76] Item 4. Information on the Company WISeKey, a Swiss cybersecurity firm, divested QuoVadis to focus on IoT, secure semiconductors, and digital identity A. History and Development of the Company WISeKey, established in 2015, sold its QuoVadis Group for $45 million in 2019 to focus on IoT and cybersecurity - In the first quarter of 2019, WISeKey completed the sale of its QuoVadis Group to DigiCert Inc. for $45 million in cash[154] - Following the sale, the company retained its ISTANA Platform to secure the connected car industry and focused its core business on Cybersecurity SaaS, secure semiconductor chips, IoT, AI, and Blockchain services[154] B. Business Overview WISeKey offers a unified cybersecurity platform for IoT, leveraging RoT and PKI, with a focus on customer expansion - WISeKey's cybersecurity platform integrates secure semiconductors, cybersecurity software, and a globally recognized Root of Trust (RoT) to protect IoT devices and digital identities[156][162] - The company's core technology is based on Digital Identities, Public Key Infrastructure (PKI), and a unique Root of Trust (RoT) endorsed by the neutral, Swiss-based OISTE Foundation[181][185][187] - Key growth strategies include expanding within the existing 3,500+ customer base, acquiring new customers, expanding geographic coverage with a focus on the U.S., and selectively pursuing strategic acquisitions[163][204] - The company's product portfolio includes secure microchips (VaultIC, Nanoseal), PKI software suites (CertifyID), digital identity management (WISeID), and brand protection solutions (WISeAuthentic)[189][191] C. Organizational Structure WISeKey International Holding AG is the parent company, with key subsidiaries in France and Switzerland | Company Name | Country of incorporation | Percentage ownership (as at Dec 31, 2019) | | :--- | :--- | :--- | | WISeKey SA | Switzerland | 95.58% | | WISeKey Semiconductors SAS | France | 100.00% | D. Property, Plants, and Equipment The company operates from leased facilities in France and Switzerland, with $1.8 million in tangible assets | Asset category | Net book value (USD millions) | | :--- | :--- | | Machinery & equipment | 1.5 | | Office equipment and furniture | 0.2 | | Computer equipment and licenses | 0.1 | | Total tangible fixed assets | 1.8 | - The company's most significant facilities are leased properties in Meyreuil, France (1,498 sq. meters) and Geneva, Switzerland (693 sq. meters)[210] Item 5. Operating and Financial Review and Prospects This section details financial performance, liquidity, and capital resources, heavily influenced by the QuoVadis divestiture A. Operating Results 2019 operating results show a 34% revenue decrease for continuing operations, offset by a $31.1 million divestiture gain | USD'000 | 12 months ended Dec 31, 2019 | 12 months ended Dec 31, 2018 | Year-on-Year Variance | | :--- | :--- | :--- | :--- | | Net sales | 22,652 | 34,280 | -34% | | Gross profit | 9,456 | 15,961 | -41% | | Operating income / (loss) | (20,504) | (9,060) | 126% | | Income/ (loss) from continuing operations, net | (23,030) | (9,908) | 132% | | Income / (loss) on discontinued operations | 30,484 | (6,357) | 580% | | Net income / (loss) | 7,454 | (16,265) | 146% | - The 34% decrease in total revenue for 2019 was primarily attributed to the sale of the QuoVadis Group, a downturn in the global semiconductor industry, and the end-of-life cycle for an older MicroPass product[232] - The company achieved a net income of $7.5 million in 2019, a significant improvement from a net loss of $16.3 million in 2018, driven by a $31.1 million gain on the disposal of the QuoVadis business[256][257] | (Million USD) | 12 months ended December 31, 2019 | 12 months ended December 31, 2018 | | :--- | :--- | :--- | | Operating loss as reported | (20.5) | (9.1) | | EBITDA | (19.2) | (7.7) | | Adjusted EBITDA | (12.6) | (2.7) | B. Liquidity and Capital Resources Liquidity improved in 2019 due to the QuoVadis sale, with $12.1 million cash and access to various financing facilities - As of December 31, 2019, the company held cash and cash equivalents of $12.1 million, bolstered by the sale of the QuoVadis Group[310] | USD'000 | 12 months ended Dec 31, 2019 | 12 months ended Dec 31, 2018 | 12 months ended Dec 31, 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | (13,891) | (8,492) | (4,931) | | Net cash provided by (used in) investing activities | 36,626 | (4,244) | (12,852) | | Net cash provided by (used in) financing activities | (17,284) | 11,876 | 25,509 | - The company has multiple financing facilities available as of year-end 2019, including CHF 56.1 million from the GEM Facility, CHF 47.1 million from the Yorkville SEDA, and CHF 30 million from the LSI Convertible Facility[321][346][381] C. Research and Development, Patents and Licenses, Etc. R&D spending increased to $6.4 million in 2019, supported by a portfolio of 88 patents - Research and development spending increased to $6.4 million in 2019, up from $5.3 million in 2018 and 2017[382] - The company owns 88 individual patents to protect its proprietary technology[382] F. Tabular Disclosure of Contractual Obligations Total contractual obligations were $11.0 million as of December 31, 2019, with $8.3 million due within one year | Contractual obligations (USD'000s) | Total | Less than 1 year | 1-3 years | 3-5 years | more than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating and short-term lease obligations | 3,132 | 591 | 910 | 588 | 1,043 | | Finance lease obligations | 285 | 114 | 171 | | | | Debt and convertible note obligations | 7,596 | 7,596 | - | - | - | | Total contractual obligations | 11,013 | 8,301 | 1,081 | 588 | 1,043 | Item 6. Directors, Senior Management and Employees This section covers leadership, compensation, board structure, and employee base, noting a headcount decrease A. Directors and Senior Management This section lists the company's non-executive and executive directors and senior management, including key figures - The board of directors includes Carlos Moreira as Chairman & CEO, Dourgam Kummer as Vice-Chairman, and Peter Ward as CFO[388] B. Compensation Compensation practices follow Swiss 'say on pay' rules, with total 2019 compensation for executives at CHF 7.9 million - Aggregate compensation paid to members of the board of directors and executive officers for the year ended December 31, 2019, was CHF 7,865,000[407] - The highest-paid executive, CEO Carlos Moreira, received total compensation of CHF 3,588,000 in 2019[407] - The company is subject to Swiss 'say on pay' rules, requiring annual shareholder votes on the maximum aggregate compensation for the board of directors and executive management[406] C. Board Practices The six-member board, with three independent directors, follows Swiss governance practices differing from NASDAQ - The board has six members, of which three are independent, which does not comply with the NASDAQ requirement for a majority-independent board, an exemption available to foreign private issuers[419] - The board has three committees: an Audit Committee, a Nomination and Compensation Committee, and a Strategy Committee[420] D. Employees Employee headcount decreased to 84 in 2019, primarily in France and Switzerland, with agreeable employee relations | Area of Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Cost of sales | 4 | 13 | 14 | | Research and development | 29 | 42 | 49 | | Selling and marketing | 23 | 45 | 36 | | General and administrative | 28 | 54 | 47 | | Total | 84 | 154 | 146 | E. Share Ownership CEO Carlos Moreira holds a controlling 58.4% voting interest, with an ESOP for Class B share options - CEO Carlos Moreira beneficially owns 38,508,733 Class A Shares (96.2% of the class) and has rights to Class B shares, giving him a total of 58.4% of the company's voting power[440][455][456] - The company has an Employee Share Option Plan (ESOP) for granting options on Class B shares to directors, employees, and consultants, with 2,727,594 options outstanding as of December 31, 2019[415][450] Item 7. Major Shareholders and Related Party Transactions This section details ownership, with CEO Carlos Moreira as major shareholder, and related party transactions with OISTE A. Major Shareholders CEO Carlos Moreira is the major shareholder, controlling 58.4% of total voting power as of December 31, 2019 | Name of beneficial owner | Total Class A Shares | Total Class B Shares*** | % Voting Power** | | :--- | :--- | :--- | :--- | | Carlos Moreira | 38,508,733 | 1,019,179 | 58.4% | B. Related Party Transactions Key related party transactions involve the OISTE foundation, which licenses its cryptographic rootkey to WISeKey - WISeKey has a perpetual license agreement with the OISTE foundation to exclusively use its cryptographic rootkey, a critical component of its technology, in return for royalties and fees[486][488] - A conflict of interest potential exists as three members of WISeKey's board of directors (Carlos Moreira, Philippe Doubre, and Dourgam Kummer) are also members of the foundation board of OISTE[481] - In 2019, OISTE invoiced WISeKey USD 219,332 for fees, and WISeKey charged OISTE USD 139,506 for hosting facilities and personnel[489] Item 8. Financial Information This section refers to consolidated financial statements and notes no material legal proceedings - The company is not aware of any legal or arbitration proceedings against it, other than a claim for breach of contract from a former employee which is not expected to have a significant financial effect[494] Item 9. The Listing Details on the company's stock listings, including Class B Shares on SIX and ADSs on NASDAQ - The company's Class B Shares are traded on the SIX Swiss Exchange under the symbol "WIHN"[498] - The company's American Depositary Shares (ADSs) are traded on the NASDAQ Capital Market under the symbol "WKEY"[498] Item 10. Additional Information This section details corporate structure, material contracts, and U.S. and Swiss tax considerations for shareholders B. Memorandum and Articles of Association Details on governance and capital structure under Swiss law, including dual-class shares and an opting-out provision - The company has a dual-class share structure where both Class A (CHF 0.01 par value) and Class B (CHF 0.05 par value) shares carry one vote each, giving Class A shareholders greater voting power relative to their capital contribution[518] - The company's Articles of Association contain an "opting-out" provision, meaning an acquirer who surpasses the 33 1/3% voting rights threshold is not obligated to make a mandatory public takeover offer to all shareholders[576] - The board is authorized to issue new shares through authorized and conditional share capital, and under certain circumstances, can limit or withdraw the pre-emptive rights of existing shareholders to facilitate strategic transactions or capital raising[505][507] C. Material Contracts Outlines significant financing agreements with Yorkville, GEM, and LSI, and the critical OISTE Root of Trust license - The company has a Standby Equity Distribution Agreement (SEDA) with Yorkville, providing up to CHF 50 million in equity financing, with CHF 47.1 million remaining available as of Dec 31, 2019[631][632] - A Share Subscription Facility (SFF) with GEM provides up to CHF 60 million, with CHF 56.1 million remaining available as of Dec 31, 2019[645][646] - The company has entered into multiple convertible loan agreements, including with Crede (USD 3M), Yorkville (USD 3.5M, later replaced), and a new facility with Long State Investment (LSI) for up to CHF 30M[635][641][650] - A collaboration agreement with the OISTE foundation grants WISeKey a worldwide license to commercialize its cryptographic Root of Trust in exchange for license and royalty fees[652][653] E. Taxation Describes U.S. federal income tax consequences for ADS holders and relevant Swiss tax laws, including PFIC status - The company does not believe it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes in 2019, but notes that this determination is uncertain and subject to change[670] - Dividends paid by the company are subject to a 35% Swiss federal withholding tax, which U.S. holders may be eligible for a partial refund, reducing the rate to 15%, under the U.S.-Switzerland tax treaty[686][688] - Distributions paid out of reserves from capital contributions are not subject to Swiss federal withholding tax[686] Item 11. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency exchange rates, commodity prices, and investment securities - The company is exposed to foreign currency exchange rate risk due to its international operations but does not currently hedge against these fluctuations[701][302] - The company has limited exposure to commodity price risk and does not use futures or other instruments to manage it[705] - As of December 31, 2019, the company held two investment securities: one at fair value ($0.76M) and one at cost ($7.0M), and does not hedge against fluctuations in their value[706] Item 15. Controls and Procedures CEO and CFO concluded disclosure controls and internal control over financial reporting were effective in 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[718] - Management assessed the internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2019[721] Financial Statements Report of Independent Registered Public Accounting Firm BDO AG issued an unqualified audit opinion on the consolidated financial statements for 2017-2019, conforming to GAAP - BDO AG issued an unqualified audit opinion on the consolidated financial statements for the fiscal years 2017, 2018, and 2019[748] - The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB)[750] Consolidated Financial Statements This section presents the consolidated financial statements for 2017-2019, including income, balance sheet, and cash flows - The Consolidated Statement of Comprehensive Income/(Loss) shows a net income of $7.5 million for 2019, compared to a net loss of $16.3 million in 2018[754] - The Consolidated Balance Sheet as of December 31, 2019, shows total assets of $49.9 million and total shareholders' equity of $20.4 million[756] - The Consolidated Statement of Cash Flows for 2019 shows net cash used in operating activities of ($13.9) million, net cash provided by investing activities of $36.6 million, and net cash used in financing activities of ($17.3) million[761] Notes to the Consolidated Financial Statements Notes detail accounting policies, going concern, segment info, QuoVadis divestiture, financing, and related parties - The company's going concern assessment indicates a need for approximately $2.1 million to fund operations and financial commitments through March 31, 2021, which it expects to cover through available financing facilities like the GEM Facility and Yorkville SEDA[769][775] - Note 37 details the divestiture of the QuoVadis Group, which was completed in January/February 2019 and resulted in a gain on disposal of $31.1 million, reported within discontinued operations[1017][1027][1031] - Note 24 provides extensive details on the company's various financing instruments, including convertible loans and equity lines of credit with GEM, ExWorks, Yorkville, Crede, and LSI, outlining their terms and accounting treatment[891][894][910] - Note 35 breaks down financial performance by the company's two reportable segments: IoT and mPKI. In 2019, the IoT segment generated $20.5 million in revenue, while the mPKI segment generated $2.1 million[1007][1009]