WISeKey Reports FY 2018 Audited Consolidated Financial Results

WISeKey Reports FY 2018 Audited Consolidated Financial Results

To host a conference call on Tuesday, March 26^th at 3:00 pm CET (10:00am ET)

• Strong revenue growth and improved margins (FY 2018 vs. FY 2017)
  • 24.6% increase in total revenue to $53.7 million
  • 41% increase in total gross profit to $29.2 million
  • Significantly decreased net losses to $16.3 million
• FY 2018 adjusted EBITDA of $6.2 million for the WISeKey Group excluding WISeCoin AG and discontinued operations following the sale of the QuoVadis SSL and PKI businesses (“QuoVadis Group”)
• $45 million cash proceeds from the sale of QuoVadis Group in Q1 2019 paved the way for significant investments in IoT, Blockchain and AI growth initiatives required to increase monetization, and for full repayment of the Line of Credit with ExWorks Capital Fund I, L.P. in the amount of $25.3 million
• 2019 expected to be another year of solid IoT operational performance due to strong offerings for securing Connected Cars with the ISTANA platform

ZUG, Switzerland, March 25, 2019 – WISeKey International Holding Ltd (“WISeKey Group” or the “Company”) (SIX: WIHN), a leading Swiss cybersecurity and IoT company, announced today its audited consolidated financial results for full year (FY) 2018 (period ended December 31, 2018).

FY 2018 Key Financials – WISeKey Group

FY 2018 Key Financials – WISeKey Group excluding WISeCoin AG and discontinued operations (QuoVadis Group)

WISeKey Group – FY 2018 total revenue grew 24.6%

Carlos Moreira, Founder and CEO of WISeKey Group noted, “Our FY 2018 total revenue grew by $10.6 million or 24.6% from FY 2017.  Growth was driven by higher revenues from both the Cybersecurity and IoT businesses, from existing and new clients.  Customer adoption continued to accelerate reaching more than 4,500 customers across all regions at the end of 2018.” 

Mr. Moreira continued, “We saw strong demand and higher adoption of WISeKey’s Semiconductor products for IoT with embedded security, products which are immune to cybersecurity attacks, in segments such as Connected Cars, Blockchain, illicit trade, luxury industry and industrial IoT.  

Revenue growth was mainly due higher revenues generated from the development of the ISTANA platform and the subsequent license and rights sale to Daimler, the development of our partnership with Cisco for semiconductor products, new customer wins in the banking and legal sectors, and a larger geographic footprint in Europe, including Germany.  Also, our FY 2018 revenue included a full year of QuoVadis Group revenue, as compared to approximately nine months in FY 2017 (QuoVadis Group acquisition was completed in April 2017).

In Europe, the main factors behind our growth were higher revenue generated from the ISTANA platform and Daimler opportunities, exceeding $4 million in total. Our presence for identification services in the banking and legal sectors increased to over $0.7 million and $0.5 million respectively, whilst the growth of our busines in Germany generated a revenue increase of over $1.0 million.

FY 2018 revenue from clients in North America grew by 19% or $3.1 million to $19.4 million.  Over $2 million of the growth in North America was driven by the development of our partnership with Cisco in our Semiconductors business. The remaining growth is attributable to the mPKI business with a year-on-year revenue increase of 6% in our Bermuda-based business, and the revenue of the QuoVadis entities acquired in April 2017 being recognized for the full 12 months in 2018, whereas in FY 2017 they were only consolidated for the period April 03 to December 31, 2017.

WISeKey Group – 41% increase in gross profit

In line with the increase in revenue, our gross profit increased by $8.5 million.  Our gross profit margin reached 54.3% in FY 2018 as compared to 48.0% in FY 2017. This is primarily due to the increased contribution of our mPKI activity which is software-based and, as such, has lower cost of sales.

WISeKey Group – EBITDA 

EBITDA for the WISeKey Group remained stable at a loss of $8.5 million in FY 2018, as compared to a loss of $8.4 million in FY 2017.

Excluding WISeCoin AG and discontinued operations, FY 2018 EBITDA was $1.3 million positive and adjusted EBITDA (excluding non-cash and non-recurring expenses) was $6.2 million positive.

WISeKey Group – significantly reduced net losses

Net losses for FY 2018 were significantly reduced to $16.3 million as compared to losses of $24.8 million for FY 2017.  This was primarily due to a decrease in non-operating expenses of $7.8 million related to non-recurring financial charges incurred in FY 2017, including a $7.1 million debt extinguishment from the amendment of the ExWorks credit line.

WISeKey Group continues to show a heavy cost structure due to its investment strategy and new and innovative lines of business, such as WISeCoin. The sections below on the operating expenses provide additional details.

WISeKey Group – analysis of FY 2018 operating expenses

Total operating expenses increased by 20.2% or $6.9 million, from $34.2 million to $41.1 million, to meet WISeKey’s development strategy. Moreover, in FY 2018 operating expenses relating to the QuoVadis entities were consolidated for the full year, whereas in FY 2017 they were only consolidated for the period April 03 to December 31, 2017 (i.e. from the acquisition date). Operating expenses for the QuoVadis entities in the period April 03 to December 31, 2017 amounted to $3.1 million, hence a net increase in operating expenses of 11.1% or $3.8 million, when excluding this factor.

R&D expenses increased by $0.7 million, or by $0.3 million when excluding the impact of the QuoVadis R&D expenses not consolidated into WISeKey in FY 2017 ($0.4 million). An R&D stock-based compensation of $0.1 million was recorded in FY 2018 (Vs $nil in FY 2017). The remaining additional R&D expenses are designed to support the development of new and existing product lines such as the ISTANA platform for the automotive industry and WISePhone.

Selling & marketing (“S&M”) expenses increased by $2.3 million, or by $2.2 million when excluding the impact of the QuoVadis S&M expenses not consolidated into WISeKey in FY 2017 ($0.1 million). Regarding selling expenses, the expansion of our sales force in Europe and North America resulted in an additional $1.5 million charge. On the marketing side, our $0.6 million investment in several critical ventures including the Blockchain Research Initiative and our successful Blockchain Davos Round Table events were designed to raise awareness on the benefits of the Blockchain technology which will be a core service offering of WISeCoin. A stock-based compensation of $0.6 million was recorded in FY 2018 compared with $0.5 million in FY 2017, hence an increase by $0.1 million.

General and Administrative (“G&A”) expenses increased by $2.6 million, but actually remained stable when excluding the impact of QuoVadis G&A expenses not consolidated into WISeKey in FY 2017 ($2.6 million).

We incurred approximately $1.2 million in costs associated with the development and launch of WISeCoin leading to the receipt of the Non-Action letter from FINMA that will enable us to move forward with our Security Token Offering (“STO”) in 2019. However, we managed to offset costs associated with the development of WISeCoin by effectively reducing other components of G&A expenses: our legal fees were reduced by $1.0 million due to the recruitment of a Legal Chief Counsel, stock-based compensation expenses decreased by $0.8 million, non-income tax expenses were lowered by $0.3 million and we had no acquisition in FY 2018, as compared to FY 2017.

The main components of our G&A costs are detailed below:

We expect G&A expenses to continue to rise in future periods to support our growth and strategic initiatives. Anticipated costs include those relating to:

• Expansion strategy:  potential acquisitions will require additional legal, auditing and accounting, and other professional G&A costs
• WISeKey STO:  additional legal and professional costs are expected to be incurred during the issuance of WISeCoin
• Employee Stock Option Plan: grants to support our staff retention strategy will impact all cost categories including G&A

Also, as we continue our expansion strategy, expenses related to sales & marketing, and R&D will continue to increase.

As the business stabilizes we will direct our efforts to reduce our cost structure.

Of note, in FY 2017 we recorded in Other Operating Income a one-time credit of $1.4 million received by our French business following the renegotiation of an unfavorable contract, which lowered our total operating expenses in that year, whilst there was no similar release in FY 2018.

Strong cash position supports growth initiatives

Cash and cash equivalents at December 31, 2018 was $11.2 million compared to $12.2 million at December 31, 2017, with the small decline due to the settlement of certain commitments related to the sale of the QuoVadis Group.

In early 2019, we received net cash proceeds of $37.7 million (total proceeds of $45 million) from the sale of the QuoVadis Group to Digicert. WISeKey used the cash proceeds to repay in full the Line of Credit with ExWorks Capital Fund I, L.P. in the amount of $25.3 million. This substantially improved the Company’s financial position and paved the way for significant investments in growth initiatives. 

Outlook for 2019 and beyond remains strong

We have taken several initiatives to generate new revenue sources, grow our client base and expand our geographic footprint.  These initiatives should gradually offset the impact of the sale of QuoVadis SSL and PKI businesses to Digicert. 

These initiatives include:

• Significantly larger sales force to take advantage of the higher demand for strong security, authentication, brand protection and anti-counterfeiting services as Cybersecurity / IoT becomes more pervasive for segments such as connected devices, connected cars, luxury products, pharmaceuticals and banking/financial sector.
• Development of the WISeKey Foresight platform that will use APIs and keys generated on VaultIC IoT chips, as the basis for Cybersecurity IoT services.
• Investments in R&D and core IoT business by developing and offering additional innovative products and solutions to further reinforce our position as a major player offering secured and trusted Blockchain architectures.

Thus, we expect 2019 to be another year of strong financial and operational performance across our Cybersecurity and IoT businesses due to:

• Higher revenue from the ISTANA platform from strategic contract deals, particularly for the Chinese market
  • WISeKey entered the Connected Car industry in 2017 by offering Daimler AG a secure way to validate the authenticity of different vehicle components, protect onboard communication and provide over-the-air software updates.  Also, ISTANA PKI allows employees, dealers and suppliers to access car components to diagnose mechanical/technical issues and update software from any location, and users to securely interact with a car’s smart features using smartphones and other devices.  
  • In late 2018, WISeKey cemented its role in the Connected Car industry by granting Daimler a perpetual license for the use of certain ISTANA PKI modules in its vehicles.
  • WISeKey will continue to further upgrade its ISTANA PKI platform into an attractive solution to secure a variety of IoT applications.
• Monetization of the WISeKey Blockchain Platform and related services
  • WISeKey Blockchain Centers of Excellence.  WISeKey in cooperation with the Blockchain Research Institute (BRI) is creating a number of interconnected Blockchain Centers of Excellence around the world, to facilitate the rapid adaptation and on-boarding of blockchain-based solutions and foster stronger collaboration between the public, private and academic sectors.
  • Each Blockchain Center of Excellence is expected to develop a particular expertise that can be shared among all centers. For example, the Blockchain Center of Excellence in Buenos Aires will spearhead the development of particular platforms and applications to fight counterfeiting, illicit trade and corruption, while the Geneva Blockchain Center of Excellence will focus on Fintech, particularly digital private banking and commodity trading applications.
• High margin revenue from the sale of WISePhone
  • WISePhone, the first ever Blockchain mobile phone, was introduced end of 2018 as the first secure blockchain phone for enterprise-grade security integrating end-to-end encrypted communication and cutting-edge secure storage technology. WISePhone is a cost-effective and flexible platform that empowers efficiency and mobility whilst protecting intellectual property and confidentiality by transforming public networks and mobile devices into highly secure communication channels for enterprises. 
• Revenue from WISeCoin starting in the second half of 2019
  • WISekey received the Non-Action Letter from FIMNA to launch its WISeCoin Security Token Offering (STO). WISeCoin is a method of verification, identification and payment between connected objects.  WISeCoin provides highly secured solutions such as biometrics-driven hardware wallets, integrated exchange platforms, microchips Blockchain enabled semiconductors, and NFC-based contactless payment solutions. WISeKey expects to start generating revenues in the second half of 2019 by charging users a micro service fee for each transaction completed using the platform.
• Higher revenues from the new Anti-Illicit Trade Technology WISeAuthentic, now expanding from luxury products to other sectors.
  • NanoSEAL: WISeKey has optimized its Brand Protection and Logistics offerings with the New NanoSealRT NFC Secure Element, an innovative solution that provides objects with a unique identity, allows them to authenticate each other and communicate online.   By combining in tiny tags original innovative features such as an Android & iOS 12 compatible authentication algorithm, tamper/opening detection and efficient radio communication, WISeKey’s NanoSealRT is able to enhance goods traceability and brand-to-consumer direct reach.
  • WISeTrustBoot: In January 2019, WISeKey introduced WISeTrustBoot, a versatile platform independent solution to provide trust in IoT devices through verifying the authenticity of the boot sequence and firmware, built on a combination of the strength of our tamper resistant secure elements, state-of-the-art crypto libraries and strong digital signatures.
• Larger market share and accelerated sales in the US where we already have a strong presence.  
• Larger geographical footprint as we continue to enter new territories via MOUs in China and in Saudi Arabia. 
• Untapped potential synergies with global organizations thanks to a partnership agreement with DigiCert to explore common opportunities in the IoT market, using our combined products to enhance mutual offerings. 
• Potential acquisitions to support our business plan of expansion into existing or new areas.

Finally, we continue to pursue our goal to list on the NASDAQ, and we believe such listing will broaden our shareholder base, elevate our profile amongst existing and potential investors and provide liquidity.  

Conference Call & Webcast
Carlos Moreira, CEO and Peter Ward, CFO will host a conference call on Tuesday, March 26, 2019, at 3:00 pm CET / 10:00 a.m. ET) to discuss these results, recent business developments and growth initiatives. A Q&A session will follow the prepared remarks.

Interested parties may participate in the call by dialing:

United States & Canada:                               877 445-9755
Switzerland (fixed/mobile):                        0 800 835 525 / 0 800 891 374
Spain (fixed/mobile):                                     900 834 236 / 900 834 876             
United Kingdom (fixed):                                               0 800 756 3429
Germany (fixed/mobile):                             0 800 182 0040 / 0 800 184 4713
France (fixed)/excl. Monaco:                     0 800 912 848
Netherlands (fixed/mobile):                       0 800 023 4340 / 0 800 022 3580
Italy (fixed/mobile):                                       800 791 612 / 800 796 508

To access the call, please dial-in approximately five minutes before the start time.  The call will also be simultaneously webcast over the Internet via the following link https://78449.themediaframe.com/dataconf/productusers/wihn/mediaframe/29150/indexl.html  and such link will also be made available in the “Investor Relations” section of WISeKey’s website http://wisekey.com/investors/.

Non-GAAP Financial Measures

On December 21, 2018, WISeKey signed a sale and purchase agreement (the “SPA”) to sell QuoVadis SSL and PKI businesses to Digicert Inc (the QuoVadis Group).  While the sale was completed in the first quarter of 2019, WISeKey assessed the SPA under ASC 205 and concluded that the operation met the requirement to be classified as held for sale (at December 31, 2018) and as such qualified as discontinued operations. This led to the results and assets and liabilities of the QuoVadis Group to be presented separately in the consolidated income statement and consolidated balance sheet.  However, WISeKey management reviewed 2018 financials on a consolidated basis, including discontinued operations results.

In managing WISeKey’s business on a consolidated basis, WISeKey management develops an annual operating plan, which is approved by our Board of Directors, using non-GAAP financial measures. In measuring performance against this plan, management considers the actual or potential impacts on these non-GAAP financial measures from actions taken to reduce costs with the goal of increasing our gross margin and operating margin and when assessing appropriate levels of research and development efforts. In addition, management relies upon these non-GAAP financial measures when making decisions about product spending, administrative budgets, and other operating expenses. We believe that these non-GAAP financial measures, when coupled with the GAAP results and the reconciliations to corresponding GAAP financial measures, provide a more complete understanding of the Company’s results of operations and the factors and trends affecting WISeKey’s business. We believe that they enable investors to perform additional comparisons of our operating results, to assess our liquidity and capital position and to analyze financial performance excluding the effect of expenses unrelated to operations, certain non-cash expenses related to acquisitions and share-based compensation expense, which may obscure trends in WISeKey’s underlying performance.  This information also enables investors to compare financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management.

These non-GAAP financial measures are provided in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The presentation of these and other similar items in WISeKey’s non-GAAP financial results should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.  Reconciliations of these non-GAAP measures to the most comparable measures calculated in accordance with GAAP are provided in the financial statements portion of this release in a schedule entitled “Financial Reconciliation of GAAP to non-GAAP Results (unaudited).”

Non-GAAP to GAAP Reconciliations

About WISeKey:
WISeKey (SIX Swiss Exchange: WIHN) is a leading global cybersecurity company currently deploying large scale digital identity ecosystems for people and objects using Blockchain, AI and IoT respecting the Human as the Fulcrum of the Internet. WISeKey Semiconductors secure the pervasive computing shaping today’s Internet of Everything. WISeKey has an installed base of over 1 billion microchips in virtually all IoT sectors (connected cars, smart cities, drones, agricultural sensors, anti-counterfeiting, smart lighting, servers, computers, mobile phones, crypto tokens etc.).  WISeKey is uniquely positioned to be at the edge of IoT as our semiconductors secure a huge amount of Big Data that, when analyzed with Artificial Intelligence (AI), can help industrial applications to predict the failure of their equipment before it happens.

Our technology, trusted by the OISTE/WISeKey’s Swiss based cryptographic Root of Trust (“RoT”) provides secure authentication and identification, in both physical and virtual environments, for the Internet of Things, Blockchain and Artificial Intelligence. The WISeKey RoT serves as a common trust anchor to ensure the integrity of online transactions among objects and between objects and people. For more information, visit www.wisekey.com.

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Disclaimer:
This communication expressly or implicitly contains certain forward-looking statements concerning WISeKey International Holding Ltd and its business. Such statements involve certain known and unknown risks, uncertainties and other factors, which could cause the actual results, financial condition, performance or achievements of WISeKey International Holding Ltd to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. WISeKey International Holding Ltd is providing this communication as of this date and does not undertake to update any forward-looking statements contained herein as a result of new information, future events or otherwise.

This press release does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, and it does not constitute an offering prospectus within the meaning of article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus within the meaning of the listing rules of the SIX Swiss Exchange. Investors must rely on their own evaluation of WISeKey and its securities, including the merits and risks involved. Nothing contained herein is, or shall be relied on as, a promise or representation as to the future performance of WISeKey.

Consolidated Statement of Comprehensive Loss

Consolidated Balance Sheet

Consolidated Statements of Cash Flows