SEALSQ p(LAES) - 2022 Q4 - Annual Report

Explanatory Note This section details the background and purpose of the special financial report filing on Form 20-F Filing Background This document is a special financial report filed on Form 20-F to provide certified financial statements for WISeKey Semiconductors SAS for FY2022 - SEALSQ Corp is filing this special financial report under Rule 15d-2 to provide certified financial statements for its predecessor, WISeKey Semiconductors SAS, for the fiscal year ended December 31, 2022[11][12] - The company's Registration Statement on Form F-1 (File No. 333-269710) was declared effective by the SEC on March 29, 2023[10] Report of the Independent Registered Public Accounting Firm This section presents the independent auditor's report and opinion on the consolidated financial statements Auditor's Opinion BDO Rhône-Alpes issued an unqualified opinion on the consolidated financial statements for 2022 and 2021, affirming U.S. GAAP conformity - The auditor, BDO Rhône-Alpes, expressed an unqualified opinion that the consolidated financial statements for 2022 and 2021 are fairly presented in accordance with U.S. GAAP[16] - The audit was performed in accordance with PCAOB standards, and the company was not required to have an audit of its internal control over financial reporting[18] - BDO Rhône-Alpes has served as the company's auditor since 2016[20] Consolidated Financial Statements This section presents the company's complete set of consolidated financial statements, including income, balance sheet, equity, and cash flow Consolidated Statements of Comprehensive Income/(Loss) The company's 2022 performance improved significantly, shifting from an operating loss to income, driven by net sales growth and tax benefits Key Income Statement Data (USD '000) | Metric | 2022 | 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Net sales | 23,198 | 16,995 | +36.5% | | Gross profit | 9,799 | 7,147 | +37.1% | | Operating income / (loss) | 2,583 | (5,041) | Turnaround to profit | | Net income / (loss) | 5,770 | (4,827) | Turnaround to profit | | Basic EPS (USD) | 3.92 | (3.72) | Turnaround to profit | - The company recorded other operating income of $2.0 million in 2022, compared to just $91 thousand in 2021, primarily due to a large accounts payable write-off[21][145] - A significant income tax benefit of $3.2 million was recorded in 2022, compared to a minor expense in 2021, contributing substantially to net income[21] Consolidated Balance Sheets Total assets increased by 83% to $21.7 million, while liabilities decreased by 16%, leading to a shift from a $13.6 million equity deficit to a positive $212 thousand in 2022 Key Balance Sheet Data (USD '000) | Metric | As at Dec 31, 2022 | As at Dec 31, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total current assets | 15,432 | 8,248 | +87.1% | | Total assets | 21,659 | 11,844 | +82.9% | | Total current liabilities | 10,628 | 7,759 | +36.9% | | Total liabilities | 21,447 | 25,407 | -15.6% | | Total shareholders' equity | 212 | (13,563) | Turnaround to positive | - Inventories more than doubled, increasing from $2.7 million in 2021 to $7.5 million in 2022[22] - Noncurrent indebtedness to related parties decreased significantly from $15.6 million in 2021 to $7.9 million in 2022[22] Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity dramatically improved in 2022, moving from a $13.6 million deficit to a positive $212 thousand, primarily due to a $7.3 million recapitalization and $5.8 million net income - A recapitalization by parent company WISeKey International Holding Ltd in 2022 contributed $7.35 million to equity[24] - Net income of $5.8 million in 2022 significantly reduced the accumulated deficit from $23.2 million to $17.4 million[24] Shareholders' Equity Movement (USD '000) | Description | 2022 | 2021 | | :--- | :--- | :--- | | Equity at start of year | (13,563) | (9,373) | | Recapitalization by WISeKey | 7,348 | - | | Comprehensive income / (loss) | 5,924 | (4,693) | | Other adjustments | 503 | 503 | | Equity at end of year | 212 | (13,563) | Consolidated Statements of Cash Flows In 2022, the company used $1.6 million in operating cash, primarily due to increased inventories, while financing activities provided $3.75 million, resulting in a $2.0 million increase in cash and equivalents Cash Flow Summary (USD '000) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | (1,554) | (3,591) | | Net cash used in investing activities | (299) | (36) | | Net cash provided by financing activities | 3,750 | 3,691 | | Net increase in cash | 1,993 | 234 | - The increase in inventories was a major use of cash in operating activities, accounting for a $5.4 million decrease in cash flow[26] - A non-cash recapitalization of $7.3 million by WISeKey International Holding Ltd was a significant financing event not reflected in the cash flow movements[26] Notes to the Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements Business Overview and Going Concern The Group, a fabless secure semiconductor manufacturer, believes it can continue as a going concern due to 2022 operating income and sufficient liquidity projections - The Group is a fabless manufacturer that designs, develops, and markets secure semiconductors, holding the intellectual property for its products[29] - The company achieved an operating income of $2.6 million in 2022, a significant improvement from the $5.0 million operating loss in 2021[32] - Management has prepared the financial statements on a going concern basis, citing sufficient liquidity based on cash projections and historical financial support from its parent company[31][32][33] Summary of significant accounting policies The company's financial statements adhere to U.S. GAAP, recognizing revenue at point of delivery, expensing R&D, and reporting as a single segment - Revenue is recognized when the company satisfies a performance obligation by transferring control of goods or services to a customer, typically at a point in time upon delivery[55][57] - All research and development (R&D) costs, software development costs, and advertising costs are expensed as incurred[63][64] - The company reports its financial performance based on a single operating segment: secure microcontrollers[74] Concentration of credit risks The company faces significant customer concentration risk, with one multinational electronics contract manufacturer accounting for 16% of sales and 34% of receivables in 2022 Customer Concentration (2022) | Customer Description | Revenue Concentration (% of total net sales) | Receivables Concentration (% of total accounts receivable) | | :--- | :--- | :--- | | Multinational electronics contract manufacturing company | 16% | 34% | | International digital security company | 10% | 6% | | International equipment and software manufacturer | 6% | 12% | - The company sells to large, international customers and notes that some clients are contract manufacturers for the same end-companies, creating an additional layer of concentration risk[89] Indebtedness to related parties In 2022, WISeKey recapitalized the Group by converting $7.35 million of debt to equity, resolving a negative equity position, with total related party indebtedness at $11.3 million by year-end - In December 2022, parent company WISeKey recapitalized the Group by forfeiting EUR 7 million ($7,348,397) of debt in exchange for 175,000 new shares to resolve a negative equity position[120][121] - The Group has a Revolving Credit Agreement with its parent, WISeKey, with the interest rate amended to 2.5% per annum in November 2022[113] - As of December 31, 2022, the total carrying value of debt owed to WISeKey and its affiliates was $11.3 million[124] Revenue Total revenue for 2022 increased by 36.5% to $23.2 million, primarily from Secure Microcontrollers, with North America being the largest market at 59% of net sales Revenue by Segment (USD '000) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Secure Microcontrollers | 18,336 | 14,850 | 11,289 | | All Other | 4,862 | 2,145 | 3,028 | | Total Revenue | 23,198 | 16,995 | 14,317 | Net Sales by Region (USD '000) | Region | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | North America | 13,609 | 10,631 | 8,217 | | Rest of EMEA | 6,566 | 3,798 | 2,892 | | Asia Pacific | 2,745 | 2,062 | 1,526 | | France | 211 | 457 | 1,614 | | Latin America | 67 | 47 | 68 | | Total Net Sales | 23,198 | 16,995 | 14,317 | Income taxes The company recorded a $3.2 million income tax benefit in 2022 due to a partial reversal of the valuation allowance on deferred tax assets, supported by improved profitability and future forecasts - In 2022, the company recorded an income tax benefit of $3,245,000, compared to an expense of $6,000 in 2021[149] - The Group partially reversed its valuation allowance on deferred tax assets in 2022 due to improved operating results and anticipated future taxable income[150] - The company has operating loss carry-forwards of $14.4 million in France, which do not expire[152] Subsequent events Post-year-end, the Semiconductors Group was acquired by SEALSQ Corp in a reverse acquisition, and all outstanding parent company loans were consolidated under a new $5 million agreement - On January 1, 2023, the Semiconductors Group was acquired by SEALSQ Corp in a reverse acquisition, which is accounted for as a recapitalization under common control[164][165] - A new loan agreement effective January 1, 2023, consolidates all outstanding debt with parent WISeKey, allowing borrowing up to $5 million at 2.5% interest, with a maturity date of December 31, 2024[166] Segment reporting The company operates as a single reportable segment, Secure Microcontrollers, which generated $18.3 million in external revenue and $0.5 million in income before taxes in 2022 - The Group has one reportable operating segment: Secure Microcontrollers, which focuses on high-end, certified secure microprocessors[168][170] Segment Performance 2022 (USD '000) | Segment | Revenues from external customers | Segment income /(loss) before income taxes | | :--- | :--- | :--- | | Secure Microcontrollers | 18,336 | 526 | | All Other | 4,862 | 2,017 | | Total | 23,198 | 2,543 |