20-F 1 e620367_20f-wisekey.htm

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 ____________________________________________________________________________________________________

 

FORM 20-F

 

____________________________________________________________________________________________________

 

(Mark One) 

     
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

 

or

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________ to _____________________.

 

Commission file number: 001-39115

____________________________________________________________________________________________________

 

WISEKEY INTERNATIONAL HOLDING AG

(Exact name of Registrant as specified in its charter)

____________________________________________________________________________________________________

 

WISEKEY INTERNATIONAL HOLDING LTD

(Translation of Registrant's name into English)

____________________________________________________________________________________________________

 

Canton of Zug, Switzerland

(Jurisdiction of incorporation or organization)

 

General-Guisan-Strasse 6

CH-6300 Zug, Switzerland

(Address of principal executive offices)

_________________________________________________________________________________________________

 

Peter Ward

Chief Financial Officer

WISeKey International Holding AG

General-Guisan-Strasse 6

CH-6300 Zug, Switzerland

Tel: +41-22-594-3000

Fax: +41-22-594-3001

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Copies to:

 

Herman H. Raspé, Esq.

Patterson Belknap Webb & Tyler LLP

1133 Avenue of the Americas
New York, New York 10036
Tel: (212) 336-2000

____________________________________________________________________________________________________

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class   Trading Symbols   Name of each exchange and on which registered

American Depositary Shares, each representing five
Class B Shares, par value CHF 0.05 per share

Class B Shares, par value CHF 0.05 per share*

 
WKEY
 
The Nasdaq Stock Market LLC

____________________
* Not for trading, but only in connection with the registration of the American Depositary Shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 40,021,988 Class A Shares and 42,839,554 Class B Shares.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "accelerated filer," "large accelerated filer" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer ☐   Accelerated Filer ☐  

Non-Accelerated Filer ☐

 

       

Emerging Growth Company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☒  

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☐

  Other ☐

 

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

 

 

TABLE OF CONTENTS

 

INTRODUCTION AND USE OF CERTAIN TERMS 1
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 2
Item 1. Identity of Directors, Senior Management and Advisers 3
Item 2. Offer Statistics and Expected Timetable 3
Item 3. Key Information 3
  A. Selected Financial Data 3
  B. Capitalization and Indebtedness 5
  C. Reasons for the Offer and Use of Proceeds 5
  D. Risk Factors 5
Item 4. Information on the Company 29
  A. History and Development of the Company 29
  B. Business Overview 29
  C. Organizational Structure 41
  D. Property, Plants, and Equipment 41
Item 4A. Unresolved Staff Comments 42
Item 5. Operating and Financial Review and Prospects 42
  A. Operating Results 42
  B. Liquidity and Capital Resources 57
  C. Research and Development, Patents and Licenses, Etc. 69
  D. Trend Information 69
  E. Off-Balance Sheet Arrangements 70
  F. Tabular Disclosure of Contractual Obligations 70
Item 6. Directors, Senior Management and Employees 70
  A. Directors and Senior Management 70
  B. Compensation 74
  C. Board Practices 77
  D. Employees 81
  E. Share Ownership 81
Item 7. Major Shareholders and Related Party Transactions 83
  A. Major Shareholders 83
  B. Related Party Transactions 85
  C. Interests of experts and counsel 92
Item 8. Financial Information 92
  A. Consolidated Financial Statements and Other Financial Information 92
  B. Significant Changes 92
Item 9. The Listing 93
  A. Listing Details 93
  B. Plan of Distribution 93
  C. Markets 93
  D. Selling Shareholders 93
  E. Dilution 93
  F. Expenses of the Issue 93
Item 10. Additional Information 93
  A. Share Capital 93
  B. Memorandum and Articles of Association 93
  C. Material Contracts 114
  D. Exchange Controls 122
  E. Taxation 122
  F. Dividends and Paying Agents 127
  G. Statement by Experts 127
  H. Documents on Display 128
  I. Subsidiary Information 128
Item 11. Quantitative and Qualitative Disclosures about Market Risk 128
Item 12. Description of Securities Other than Equity Securities 129
  A. Debt Securities 129
  B. Warrants and Rights 129

 

i 

 

 

  C. Other Securities 129
  D. American Depositary Shares 129
Item 13. Defaults, Dividend Arrearages and Delinquencies 131
Item 14. Material Modifications to The Rights of Security Holders and Use of Proceeds 131
Item 15. Controls and Procedures 131
Item 16. [RESERVED] 131
Item 16A. Audit Committee Financial Expert 131
Item 16B. Code of Ethics 131
Item 16C. Principal Accounting Fees and Services 131
Item 16D. Exemptions from the Listing Standards for Audit Committees 132
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 132
Item 16F. Change in Registrant's Certifying Accountant 132
Item 16G. Corporate Governance 133
Item 16H. Mine Safety Disclosure 133
Item 17. Financial Statements 134
Item 18. Financial Statements 134
Item 19. Exhibits 134
Index to Exhibits 134
SIGNATURES 137

 

ii 

 

INTRODUCTION AND USE OF CERTAIN TERMS

 

We were formed in 2015 as a holding company to incorporate, acquire, hold, and dispose of interests in national and international entities, in particular entities active in the area of security technology and related areas. Our Class B Shares, as defined below, have been listed on the Swiss Exchange (SIX) since 2016 and our American Depositary Shares ("ADSs") have been listed on the Nasdaq Stock Market LLC under the symbol "WKEY" since December 4, 2019. The Bank of New York Mellon, acting as depositary, registers and delivers our ADSs, each of which represents five of our Class B Shares.

 

We have prepared this annual report using a number of conventions, which you should consider when reading the information contained herein. In this annual report, "we," "us," "our Company," "the Group," "WISeKey," "WISeKey International Holding Ltd" and "our" shall refer to WISeKey International Holding AG and its subsidiaries, affiliates, and predecessor entities. Additionally, this annual report uses the following conventions:

 

·"CHF" and "Swiss francs" refer to the legal currency of Switzerland

 

·"Class A Shares" refers to our Class A Shares, par value CHF 0.01 per share

 

·"Class B Shares" refers to our Class B Shares, par value CHF 0.05 per share

 

·"NASDAQ" refers to the Nasdaq Stock Market LLC

 

·"PKI" refers to Public Key Infrastructure

 

·"$," "US $," "USD" and "U.S. dollars" refer to the legal currency of the United States

 

·"SIX" refers to the Swiss Exchange (SIX)

 

·"Switzerland" refers to the Swiss Confederation

 

·"IoT" refers to Internet of Things

 

·“RPA” refers to Robotic Process Automation

 

·“SaaS” refers to Software as a Service

 

 1

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This annual report contains forward-looking statements. Some of these forward-looking statements can be identified by terms and phrases such as "anticipate," "should," "likely," "foresee," "believe," "estimate," "expect," "intend," "continue," "could," "may," "plan," "project," "predict," "will," and similar expressions. Forward-looking statements appear in a number of places in this annual report and include, but are not limited to, statements contained in the sections entitled "Item 3. Key Information," "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects."

 

These forward-looking statements include, but are not limited to, statements relating to:

 

·Our anticipated goals, growth strategies and profitability;

 

·Our ability to attract new customers and retain existing customer base;

 

·Our ability to attract and retain qualified employees and key personnel;

 

·Our ability to develop new products and enhancements to our existing products;

 

·Our ability to anticipate market needs and opportunities;

 

·Our ability to prevent security breaches and unauthorized access to confidential customer information;

 

·Our ability to maintain, protect and enhance our intellectual property;

 

·The sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

·Our ability to comply with modified or new laws and regulations relating to our industries;

 

·The activities of our competitors and the introduction of competing products by our competitors;

 

·How long we will qualify as an emerging growth company or a foreign private issuer;

 

·The future growth of the information technology and cybersecurity industry;

 

·Assumptions underlying or related to any of the foregoing;

 

·Other risks and uncertainties, including those listed in this section of this Form 20-F titled "Item 3.D—Risk Factors."

 

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us and are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by these forward-looking statements which are set forth in "Item 3D. Risk Factors." Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.

 

Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement included in this annual report should not be construed as exhaustive. You should read this annual report, and each of the documents filed as exhibits to the annual report, completely, with this cautionary note in mind, and with the understanding that our actual future results may be materially different from what we expect.

 

 2

 

Item 1.Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.Key Information

 

A.Selected Financial Data

 

The following tables set forth our selected consolidated financial and other data for the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018 and are derived from our audited consolidated financial statements included elsewhere in this annual report. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report, and the information contained in "Item 5. Operating and Financial Review and Prospects" and "Item 3D. Risk Factors." The historical financial and other data included here and elsewhere in this annual report should not be assumed to be indicative of our future financial condition or results of operations.

 

We note that, in 2020, the Group adopted Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820) which, under its core principle, modifies the disclosure requirements on fair value measurements. The Group also adopted ASU 2016-13, Financial Instruments – Credit Losses, which requires the measurement of expected lifetime credit losses, rather than incurred losses, for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts and ASU 2019-04, Codification improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments to ASU 2016-01, 2016-13 & 2017-12. The Group has elected to follow this guidance.

 

We adopted the new standards as of January 01, 2020. Accordingly, previously reported financial statements, including footnote disclosures, have not been recast to reflect the application of the new standard to all comparative periods presented. Financial statements for the years ended December 31, 2019 and 2018 have not been restated.

 

Therefore, our selected consolidated financial and other data for the fiscal year ended December 31, 2020 reflect the requirements of the related ASUs, whilst our selected consolidated financial and other data for the fiscal years ended December 31, 2019 and December 31, 2018 reflect the old standards.

 

 3

 

Consolidated Statement of Comprehensive Income/(Loss)

 

  12 months ended December 31,
USD'000 (except earnings per share: USD) 2020 2019 2018
Net sales 14,779 22,652 34,280
Cost of sales (8,578) (12,871) (17,607)
Depreciation of production assets (736) (325) (712)
Gross profit 5,465 9,456 15,961
Total operating expenses (23,997) (29,960) (25,021)
Operating loss (18,532) (20,504) (9,060)
Non-operating expenses (10,366) (2,513) (795)
Loss from continuing operations before income tax expense (28,898) (23,017) (9,855)
Income tax expense (9) (13) (53)
Loss from continuing operations, net (28,907) (23,030) (9,908)
Income / (loss) on discontinued operations - 30,484 (6,357)
Net income / (loss) (28,907) 7,454 (16,265)
       
Less: Net income / (loss) attributable to noncontrolling interests (248) (733) 13
Net income / (loss) attributable to WISeKey International Holding AG (28,659) 8,187 (16,278)
       
Earnings per share (USD)      
Earnings from continuing operations per share - Basic (0.68) (0.64) (0.29)
Earnings from continuing operations per share - Diluted (0.68) (0.64) (0.29)
Earnings from discontinued operations per share - Basic - 0.84 (0.19)
Earnings from discontinued operations per share - Diluted - 0.81 (0.19)
Earning per share attributable to WISeKey International Holding AG      
Basic (0.67) 0.23 (0.48)
Diluted (0.67) 0.23 (0.48)
       
Other comprehensive income / (loss) 8,303 (1,683) 395
Comprehensive income / (loss) (20,604) 5,771 (15,870)
       
Comprehensive income / (loss) attributable to noncontrolling interests (343) (860) (10)
Comprehensive income / (loss) attributable to WISeKey International Holding AG (20,261) 6,631 (15,860)

 

 

 4

 

Consolidated Balance Sheet

 

  As at December 31,
USD'000 (except share amounts) 2020 2019
Cash and cash equivalents 19,650 12,121
Restricted cash, current 2,113 2,525
Other current assets 16,900 8,938
Total current assets 38,663 23,584
Total noncurrent assets 14,218 26,320
TOTAL ASSETS 52,881 49,904
     
Total current liabilities 24,977 20,150
Total noncurrent liabilities 13,478 9,310
TOTAL LIABILITIES 38,455 29,460

Common stock - Class A

CHF 0.01 par value

Authorized - 40,021,988, 40,021,988 and 40,021,988 shares

Issued and outstanding - 40,021,988, 40,021,988 and 40,021,988 shares

400 400

Common stock - Class B

CHF 0.05 par value

Authorized – 63,234,625, 41,066,298 and 41,063,901

Issued – 47,622,689, 28,824,086 and 28,769,797

Outstanding – 42,839,554, 27,621,895 and 26,681,736

2,490 1,475
Total shareholders' equity attributable to WISeKey shareholders 16,269 22,015
Noncontrolling interests in consolidated subsidiaries (1,843) (1,571)
Total shareholders' equity 14,426 20,444
TOTAL LIABILITIES AND EQUITY AND REDEEMABLE PREFERRED SHARES 52,881 49,904

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

Risks Related to Our Business and Industry

 

COVID-19 and prolonged economic uncertainties or downturns could materially adversely affect our business.

 

Our business depends on our current and prospective customers' ability and willingness to spend money in security applications, which in turn is dependent upon the overall economic health. Negative economic conditions have been seen globally since the COVID-19 pandemic began and while there is positive movement, the overall economic impact is still unknown. As a result of the overall impact of COVID-19 and other conditions resulting from financial and credit market fluctuations, there could be a decrease in corporate spending on information security software. Continuing economic challenges may cause our customers to re-evaluate decisions to purchase our solution or to delay their purchasing decisions, which could adversely impact our results of operations.

 

 5

 

The future growth of the information technology and cybersecurity industry is uncertain.

 

Information (including cybersecurity) technology companies are generally subject to the following risks: rapidly changing technologies; short product life cycles; fierce competition; aggressive pricing and narrow profit margins; the loss of patent, copyright and trademark protections; cyclical market patterns; evolving industry standards; and frequent new product introductions. Technology companies may be smaller and less experienced companies, with limited product lines, markets or financial resources and fewer experienced management or marketing personnel. Information technology company stocks, especially those which are Internet related, have experienced extreme price and volume fluctuations that are often unrelated to their operating performance.

 

Technological Change

 

WISeKey needs to keep pace with changing technologies in order to provide effective identification and authentication solutions. In addition, we need to continue adjacent and inorganic growth in order to broaden and strengthen the portfolio of products and stay ahead of the technology changes and risks in order to be successful. WISeKey needs to anticipate, and quickly react to, rapid changes occurring in communications technologies and to the development of new and improved devices and services that result from these changes. WISeKey must also continue to move vertically up the value chain with its customers in order to secure future business and substantiate growth. If WISeKey is unable to respond quickly and cost-effectively to changing communications technologies and devices and evolving industry standards, the existing service offering could become non-competitive and WISeKey may lose market share. WISeKey's success will depend, in part, on its ability to effectively use leading technologies critical to the business, enhance its existing solutions, find appropriate technology partners, and continue to develop new solutions and technology that address the increasingly sophisticated and varied needs of its current and prospective clients and their customers and its ability to influence and respond to technological advances, emerging industry and regulatory standards and practices and competitive service offerings. WISeKey's ability to remain technologically competitive may require substantial expenditures and lead-time and the integration of newly acquired technologies will also take time. If WISeKey is unable to adapt and integrate in a timely manner to changing market conditions or customer requirements, its business, financial condition and results of operations could be seriously harmed.

 

WISeKey faces intense competition from companies that are larger and better known than we are, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

 

The digital security market and now the knowledge automation space in which we operate face intense competition, constant innovation and evolving security threats. There are several global security companies with strong presence in this market, including VeriSign, Inc., DigiCert Inc., Entrust Datacard, Let's Encrypt, Symantec Corporation, FireEye, Inc., Red Hat Software, VASCO Data Security International, Inc., Zix Corp, NXP Semiconductors, Infineon Technologies, STMicroelectronics and Samsung Electronics. As we integrate and move into the knowledge automation space there are also related data lake and automation companies with strong foundations including Palantir and Snowflake.

 

Some of our competitors are large companies that have the technical and financial resources and broad customer bases needed to bring competitive solutions to the market and already have existing relationships as a trusted vendor for other products. Such companies may use these advantages to offer products and services that are perceived to be as effective as ours at a lower price or for free as part of a larger product package or solely in consideration for maintenance and services fees. They may also develop different products to compete with our current security solutions and respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or client requirements. Additionally, we may compete with smaller regional vendors that offer products with a more limited range of capabilities that purport to perform functions similar to our security solutions. Such companies may enjoy stronger sales and service capabilities in their particular regions.

 

WISeKey's competitors may have competitive advantages, such as:

 

·greater name recognition, a longer operating history and a larger customer base;

 

 6

 

·larger sales and marketing budgets and resources;

 

·broader distribution and established relationships with distribution partners and customers;

 

·greater customer care and support resources;

 

·broader supply chains;

 

·greater resources to make acquisitions;

 

·larger intellectual property portfolios; and

 

·greater financial, technical and other resources.

 

Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. Current or potential competitors may be acquired by third parties with access to greater available resources. As a result of such acquisitions, our current or potential competitors may be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products, which would lead to increased pricing pressure on our products and could cause the average sales prices for our products to decline.

 

If WISeKey does not successfully anticipate market needs and enhance existing products or develop new products that meet those needs on a timely basis, WISeKey may not be able to compete effectively and WISeKey's ability to generate revenues will suffer.

 

Many of our customers operate in markets characterized by rapidly changing technologies and business plans, which require them to adapt to increasingly complex digital security infrastructures to protect internal and external corporate communications. As our customers' technologies and business plans grow more complex, we expect them to face new and increasingly sophisticated threats of security breach or counterfeiting. WISeKey faces significant challenges in ensuring that our security and automation solutions effectively protect identities of individual customers, company information and their brands in addition to driving efficient operations through automated decision making. As a result, we must continually modify and improve our products in response to changes in our customers' technology infrastructures.

 

WISeKey may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our security and automation solutions even in light of new technologies and integration, our business, results of operations and financial condition could be materially and adversely affected.

 

WISeKey cannot guarantee that it will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such needs or opportunities in a timely manner, if at all. Even if we are able to anticipate, develop and commercially introduce enhancements and new products, there can be no assurance that enhancements or new products will achieve widespread market acceptance.

 

Our product enhancements or new products could fail to attain sufficient market acceptance for many reasons, including:

 

·delays in releasing product enhancements or new products;

 

·failure to accurately predict market demand and to supply products that meet this demand in a timely fashion;

 

·failure to accurately price products and solutions;

 

 7

 

·inability to interoperate effectively with the existing or newly introduced technologies, systems or applications of our existing and prospective customers;

 

·defects in our products;

 

·Inability to integrate security and automation;

 

·negative publicity about the performance or effectiveness of our products;

 

·introduction or anticipated introduction of competing products by our competitors; and

 

·installation, configuration or usage errors by our customers.

 

If WISeKey fails to anticipate market requirements or fails to develop and introduce product enhancements or new products to meet those needs in a timely manner, that could cause us to lose existing customers and prevent us from gaining new customers, which would significantly harm our business, financial condition and results of operations.

 

Sometimes it will be necessary to make a product or product line obsolete and there may be negative impacts to sales or disruption to the customer base during the ramp down of that product.

 

All products have a natural lifecycle that includes the inevitable end-of-life (“EOL”) process. During the ramping down of a product, or product family, there are many ways that our business operations can be challenged. Last time buys are a typical way for customers to deal with the EOL of a product that is still critical to one of their end products. These kinds of orders show an increase in short term sales but result in the abrupt drop off of revenue from that customer, for that product, after the last time buy is delivered. Discontinuing a product also comes with the risk that we may lose that customer for good if we do not have a replacement for the product or if they decide to look at alternative suppliers because of the change in supply.

 

WISeKey is subject to a number of risks associated with global sales and operations.

 

Business practices in the global markets that we serve may differ and may require us to include non-standard terms in customer contracts, such as extended payment or warranty terms. To the extent that we enter into customer contracts that include non-standard terms related to payment, warranties or performance obligations, our results of operations may be adversely impacted.

 

Additionally, our global sales and operations are subject to a number of risks, including the following:

 

·difficulty in enforcing contracts and managing collections, as well as long collection periods;

 

·costs of doing business globally, including costs incurred in maintaining office space, securing adequate staffing and localizing our contracts;

 

·management communication and integration problems resulting from cultural and geographic dispersion;

 

·risks associated with trade restrictions and foreign legal requirements;

 

·risk of unexpected changes in regulatory practices, tariffs, tax laws and treaties;

 

·compliance with anti-bribery laws;

 

·heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements;

 

·social, economic and political instability, terrorist attacks and security concerns in general;

 

 8

 

·reduced or uncertain protection of intellectual property rights in some countries; and

 

·potentially adverse tax consequences.

 

These factors could harm our ability to generate future global revenues and, consequently, materially impact our business, results of operations and financial condition.

 

Some of our larger opportunities depend on our customers’ ability to be awarded significant regional or national contracts in order to fulfil the volume predictions that were used in the pricing negotiations and forecasts.

 

The design of many industrial device comes with the risk that the product may not see the demand that was expected in that market, or the high-volume contracts may be awarded to competing suppliers. Our customers may be bidding against several other suppliers to win a government contract and if they lose the bid, we will not see the results that were originally expected during the forecasting of the opportunity size and profitability.

 

The shift into knowledge automation and artificial intelligence is unknown and unproven on a global scale.

 

The automation market has been moving forward with Robotic Process Automation (“RPA”) for years and the demand in the market for the next evolution of such technology remains unknown. Our potential customers need to be accepting to move forward from their current business process automation and RPA implementations in order for WISeKey to be successful. The ability for WISeKey to predict the market and conditions is yet to be proven and the customer reaction remains unknown. In addition, the complex implementation in this sphere requires focused delivery resources and clear plans with the customer. Customer input and knowledge is critical to the success of knowledge automation and therefore some of WISeKey’s potential success will be reliant on its customers belief in the value proposition but their ability to support the implementation.

 

Our research and development efforts may not produce successful products or enhancements to our security and automation solutions that result in significant revenue or other benefits in the near future, if at all.

 

Investing in research and development personnel, developing new products and enhancing existing products is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to our products, design improvements, cost savings, revenues or other expected benefits. If we spend significant time and effort on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be adversely affected. This is expected to be exacerbated in the coming year with the required integration of newly acquired knowledge automation assets which is expected to result in a more complex research and development program.

 

If WISeKey is unable to attract new customers, our future revenues and operating results will be harmed.

 

Our success depends in large part on our ability to attract new customers. The number of customers that WISeKey adds in a given period impacts both our short-term and long-term revenues. If WISeKey is unable to successfully attract a sufficient number of new customers, we may be unable to generate revenue growth.

 

A large amount of investment in sales and marketing and support personnel is required to attract new customers. If we are unable to convince these potential new customers of a need for our products or if we are unable to persuade them of our products' efficacy, we may be unable to achieve growth and there may be a meaningful negative impact on future revenues and operating results.

 

Software errors and non-compliance may affect our reputation and our financial results.

 

WISeKey's software applications are complex, the addition of newly acquired assets increases this complexity and there is a risk that defects or errors could arise, particularly where new versions or enhancements are released. Similarly, regulatory and industry requirements are continuously evolving and we may not be able to keep up with them. This could result in adverse consequences for us, such as lost revenue, a delay in market acceptance or customer claims.

 

 9

 

If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.

 

We operate sensitive public key infrastructure ("PKI") platforms, retain certain confidential customer information in our secure data centers and registration systems, and our digital certificates and electronic signatures may be used by customers in mission critical applications. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. We may have to expend significant time and money to maintain or increase the security of our facilities and infrastructure. Despite our security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, attacks by hackers or similar disruptive problems. It is possible that we may have to expend additional financial and other resources to address such problems. In the event of a security breach, we could face significant liability, customers could be reluctant to use our services and we could be at risk for loss of various compliance certifications needed for the operation of our businesses.

 

WISeKey's reputation and business could be harmed based on real or perceived shortcomings, defects or vulnerabilities in our security solutions or the failure of our security solutions to meet customers' expectations.

 

Organizations are facing increasingly sophisticated digital security threats and threats of counterfeiting. If WISeKey fails to identify and respond to new and increasingly complex methods of counterfeiting products or hacking personal and corporate digital accounts, our business and reputation will suffer. In particular, WISeKey may suffer significant adverse publicity and reputational harm if any of our products fail to perform as advertised. An actual or perceived breach of our customers' sensitive business data, regardless of whether the breach is attributable to the failure of our products, could adversely affect the market's perception of the efficacy of our security solutions and current or potential customers may look to our competitors for alternatives to our security solutions. Similarly, an actual or perceived failure of our product to prevent counterfeit products from being detected, regardless of whether such failure is attributable to our products, could adversely affect the market's perception of the efficacy of our authentication solutions and could encourage current or potential customers to look to our competitors for an alternative to our products. The failure of our products may also subject us to product liability lawsuits and financial losses stemming from indemnification of our partners and other third parties, as well as the expenditure of significant financial resources to analyze, correct or eliminate any vulnerability. It could also cause us to suffer reputational harm, lose existing customers or deter them from purchasing additional products and services and prevent new customers from purchasing our security solutions.

 

International Expansion

 

WISeKey's strategy includes the international expansion of its business. The expansion into international markets may cause difficulties because of distance, as well as language and cultural differences. Other risks related to international operations include fluctuations in currency exchange rates, difficulties arising from staffing and managing foreign operations, legal and regulatory requirements of different countries, potential political and economic instability, and overlapping or differing tax laws. Management cannot assure that it will be able to market and operate WISeKey's services successfully in foreign markets, select appropriate markets to enter, open new offices efficiently or manage new offices profitably. If WISeKey is not successful in accessing new markets, its results of operations and financial condition could be materially and adversely affected.

 

If WISeKey is unable to hire, retain and motivate qualified personnel, our business will suffer.

 

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. Any of our employees may terminate their employment at any time. Competition for highly skilled personnel is frequently intense. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or have divulged proprietary or other confidential information. Further, the training and integration of new employees requires allocation of a significant amount of internal resources and, even if we make this investment, there is no guarantee that existing or new personnel will remain or become productive members of our team. Our inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in sales & marketing and research & development, may seriously harm our business, financial condition and results of operations.

 

Furthermore, WISeKey's performance depends on favorable labor relations with our employees and compliance with labor laws in the countries where we have employees and plans to hire new employees. Any deterioration of current relations or increase in labor costs due to our compliance with labor laws could adversely affect our business.

 

 10

 

Dependence on key personnel and loss of such key personnel may have a negative impact on the operations and profitability of WISeKey.

 

Our future success depends in part on the continued service of our key personnel, particularly, the members of our senior management. We have employment agreements with our key personnel, but these do not prevent such personnel from choosing to leave the Company.

 

One of the cryptographic rootkeys used by WISeKey is owned by the Organisation Internationale pour la Sécurité des Transactions Electroniques OISTE. The Organisation Internationale pour la Sécurité des Transactions Electroniques OISTE has granted us a perpetual license to exclusively use the cryptographic rootkey. A termination of the license agreement would present a threat to WISeKey's existing business model.

 

The cryptographic rootkey used by WISeKey is owned by the Organisation Internationale pour la Sécurité des Transactions Electroniques OISTE ("OISTE") acting as a trusted third party and not-for-profit entity in charge of ensuring that the Root of Trust (the "RoT") remains neutral and trusted. The name of the RoT is OISTE/WISeKey, as shown in all major current browsers that embed the rootkey. Three members of the three-member foundation board of OISTE are WISeKey board members. Members of the foundation board of OISTE are appointed by a policy authorizing authority (the "Policy Authorizing Authority" or "PAA"), whose members are international organizations, governments and large corporations that use the OISTE/WISeKey RoT. OISTE has granted us a perpetual license to exclusively use the cryptographic rootkey and develop technologies and processes based on OISTE's trust model. The perpetual license agreement can only be terminated under limited circumstances, including if WISeKey were to move from the trust model developed by OISTE and/or changing the location of the RoT from Switzerland to another country. A termination of the license agreement would present a threat to WISeKey's current trust model.

 

Services offered by our PKI business rely on the continued integrity of public key cryptography technology and algorithms that may be compromised or proven obsolete over time.

 

Services offered by our PKI business are based on public key cryptography technology. With public key cryptography technology, a user possesses a public key and a private key, both of which are required to perform encryption and decryption operations. The security afforded by this technology depends on the integrity of a user's private key and ensuring that it is not lost, stolen or otherwise compromised. Advances in attacks on cryptographic algorithms and technology may weaken their effectiveness, and significant new technology requirements may be imposed by root distribution programs that require us to make significant modifications to our systems or to reissue digital certificates to some or all of our customers, which could damage our reputation or otherwise harm our business. Severe attacks on public key cryptography could render PKI services in general obsolete or unmarketable.

 

We are dependent on the timely supply of equipment and materials from various sub-contractors and if any one of these suppliers fail to meet, or delays, their committed delivery schedules, we can suffer with lower or lost revenues.

 

We use various suppliers for silicon manufacturing and testing our parts. Any one of these suppliers could not meet their commitments for on-time delivery of our products. The market supply of such products has seen and continues to see difficulties in meeting demand and these kinds of supply disruptions can happen due to global shortages of silicon wafers or chemicals used in the processing of the silicon packaging or shortages in the labor force due to unrest or sicknesses. Our business and operating conditions can be at risk if we cannot deliver on our product demand as committed in our customer contracts.

 

Failure of our third-party suppliers to handle increased volume for their services could impact our ability to take advantage of upside business opportunities.

 

We outsource several critical functions in our supply chain to third-party suppliers such as the manufacture of our semiconductors. They all have a number of risks that are present in their businesses that could limit their ability to meet increased demands if we see increased orders from our customers. If our suppliers cannot satisfy our demand, we may not be able to meet our customer demands. Also, if our suppliers add higher costs to cover their increased volume, we may see drops in our gross profit margins. Many of these costs are not fixed, even though there may be contracts in place, and may be at the discretion of the third-party vendor.

 

 11

 

Financial Risks

 

WISeKey has entered, and expects to continue to enter, into joint venture agreements and these activities involve risks and uncertainties.

 

WISeKey has entered, and expects to continue to enter, into joint venture agreements in order to effectively grow its revenue and penetrate certain geographic regions. Entering into joint venture agreements or other similar forms of partnership involves risks and uncertainties, including the risk that the partners that we enter into joint ventures with will not have the market connections that we expect them to bring to the joint venture. Additionally, there is a risk that a given joint venture could fail to satisfy its obligations, which may result in certain liabilities to us for guarantees and other commitments. Further, since we may not exercise control over our current or future joint ventures, we may not be able to require our joint ventures to take the actions that we believe are necessary to implement our business strategy. Additionally, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If any of these difficulties cause any of our joint ventures to deviate from our business strategy, or if this leads any of our joint ventures to fail to attract the customer base that we project it to attract, our results of operations could be materially adversely affected.

 

WISeKey is exposed to risks associated with acquisitions and investments.

 

We may in the future make acquisitions of, or investments in, existing companies or existing or new businesses. Acquisitions and investments involve numerous risks that vary depending on their scale and nature, including, but not limited to:

 

·diversion of management's attention from other operational matters;

 

·inability to complete proposed transactions as anticipated or at all (and any ensuing obligation to pay a termination fee or other costs and expenses);

 

·the possibility that the acquired business will not be successfully integrated or that anticipated cost savings, synergies or other benefits will not be realized;

 

·the acquired business or strategic partnership may lose market acceptance or profitability;

 

·a decrease in our cash or an increase in our indebtedness, including security interests that may have to be constituted as part of the acquisition indebtedness, may limit our ability to access additional capital when needed;

 

·failure to commercialize purchased technologies, intellectual property rights or partnered solutions;

 

·initial dependence on unfamiliar supply chains or relatively small supply partners;

 

·inability to obtain and protect intellectual property rights in key technologies;

 

·incurrence of unexpected liabilities; and

 

·loss of key personnel and clients or customers of acquired businesses.

 

In addition, if WISeKey is unsuccessful at integrating such acquisitions or the technologies associated with such acquisitions, our revenues and results of operations could be adversely affected. Any integration process may require significant time and resources, and WISeKey may not be able to manage the process successfully. WISeKey may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. WISeKey may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition. The sale of equity or incurrence of debt to finance any such acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

 

 12

 

WISeKey has a history of losses and may not achieve profitability in the future.

 

WISeKey has invested substantial amounts of financial resources so far on its acquisitions, brand technology and market position. As at December 31, 2020, WISeKey had, on a consolidated level, an accumulated cumulative loss of USD 217,819,809, compared to USD 189,161,455 as at December 31, 2019 and USD 197,348,528 as at December 31, 2018. In the past, we made significant investments in our operations which have not resulted in corresponding revenue growth and, as a result, increased our losses. WISeKey expects to make significant future investments to support the further development and expansion of our business and these investments may not result in increased revenue or growth on a timely basis or at all.

  

WISeKey may also incur significant losses in the future for a number of reasons, including slowing demand for our products and services, increasing competition, weakness in the software and security industries generally, as well as other risks described herein, and we may encounter unforeseen expenses, difficulties, complications and delays, and other unknown factors. If WISeKey incurs losses in the future, we may not be able to reduce costs effectively because many of our costs are fixed. In addition, to the extent that we reduce variable costs to respond to losses, this may affect our ability to attract customers and grow our revenues. Accordingly, WISeKey may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future.

 

Certain of the Company's large shareholders, including if acting in concert, may be able to exert significant influence on the Company and their interests may conflict with the interests of its other shareholders.

 

Our founder, Carlos Moreira, holds more than 40% of the Company's voting rights as at December 31, 2020. Further, all holders of the Class A Shares represent approximately 45% of the Company's voting rights as at December 31, 2020. Our founder, or if the holders of Class A Shares were to act in concert with each other, the holders of the Class A Shares, would be able to exert significant influence over certain matters, including matters that must be resolved by the general meeting of shareholders, such as the election of members to the board of directors or the declaration of dividends or other distributions. To the extent that the interests of these shareholders may differ from the interests of the Company's other shareholders, the Company's other shareholders may be disadvantaged by any actions that these shareholders may seek to pursue.

 

The market for and price of Class B Shares and our ADSs may be highly volatile.

 

There has not been a public market in the United States for our Class B Shares, and the market for the ADS listed on NASDAQ is limited. You may not be able to sell your ADSs quickly or at the market price if trading in the ADSs is limited.

 

The market price of Class B Shares and our ADSs may be highly volatile and may be affected negatively by events involving us, our competitors, the software and security industry, or the financial markets in general. Furthermore, investors might not be able to resell their Class B Shares and our ADSs at the price at which they were purchased or at a higher price or at all. Factors that could cause this volatility in the market price of Class B Shares and our ADSs include, but are not limited to:

 

·our operating and financial results;

 

·future announcements concerning our business;

 

·changes in revenue or earnings estimates and recommendations by securities analysts;

 

·changes in our business strategy and operations;

 

·changes in our senior management or board of directors;

 

·speculation of the press or the investment community;

 

 13

 

·disposals of Class B Shares by shareholders;

 

·actions of competitors;

 

·our involvement in acquisitions, strategic alliances or joint ventures;

 

·regulatory factors;

 

·arrival and departure of key personnel;

 

·investment community views on technology stock;

 

·liquidity of the Class B Shares and our ADSs; and

 

·general market, economic and political conditions.

 

In addition, securities markets in general have from time to time, experienced significant price and volume fluctuations. Such fluctuations, as well as the economic environment as a whole, can have a substantial negative effect on the market price of our securities, regardless of our operating results or our financial position. Any such broad market fluctuations may adversely affect the trading price of our securities.

 

Our securities will be traded on more than one market or exchange and this may result in price variations.

 

Our Class B Shares have been trading on the SIX since March 2016. The ADSs have been listed on NASDAQ since December 2019. Trading in Class B Shares and ADSs, as applicable, on these markets will take place in different currencies (U.S. dollars on NASDAQ and Swiss francs on the SIX), and at different times (resulting from different time zones, trading days, and public holidays in the United States and Switzerland). The trading prices of our Class B Shares and ADSs on these two markets may differ due to these and other factors. Any decrease in the price of our Class B Shares on the SIX could cause a decrease in the trading price of the ADSs on NASDAQ, and vice versa.

 

Future sales or issuances, or the possibility or perception of future sales or issuances, of a substantial number of Shares could cause the market price of our Class B Shares or the ADSs to fall.

 

The market price of our Class B Shares or ADSs could decline as a result of sales of a large number of Class B Shares in the public market in the future or the possibility or perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for the Company to issue equity securities in the future at a time and price that it deems appropriate.

 

Further, the Company may choose to raise additional capital by issuing additional Class B Shares, depending on market conditions or strategic considerations. In particular, under our Articles of Association as at December 31, 20201, the board of directors is authorized to issue up to 7,808,906 new Class B Shares out of authorized capital at any time until May 15, 2022 and thereby increase the Company's share capital without further shareholder approval. After May 15, 2022 (and each subsequent two-year period), the shareholders may re-approve this authorization. Further, our Articles of Association provide for a conditional share capital based on which, as at December 31, 2020, the Company is authorized to issue up to 7,804,030 new Class B Shares, corresponding to CHF 390,201.50 in par value. Since December 16, 2020, the date of reference for the last formal recording in the Articles and the commercial register of the Canton of Zug, Switzerland, an aggregate number of 359,566 Class B Shares has been issued out of the Company's conditional share capital as at December 31, 2020. As a result, the available conditional share capital of the Company, as at December 31, 2020, amounted to CHF 372,223.20, corresponding to the issuance of 7,444,464 Class B Shares. Among other things, the Company's conditional share capital could be used in connection with the issuance of securities that are convertible into Class B Shares. To the extent that additional capital is raised through the issuance of Class B Shares or other securities that are convertible into Class B Shares, the issuance of such securities could dilute the Company's shareholders' interest in the Company.

 

_____________________________

1 The Company held an extraordinary general meeting on January 28, 2021 where our shareholders voted to increase both the authorized capital and the conditional capital of the Company. Therefore, under our Articles of Association approved at the extraordinary general meeting on January 28, 2021, the board of directors is authorized to issue up to 25,313,543 new Class B Shares out of authorized capital at any time until January 28, 2023 and thereby increase the Company's share capital without further shareholder approval. After January 28, 2023 (and each subsequent two-year period), the shareholders may re-approve this authorization. Further, our Articles of Association provide for a conditional share capital based on which, the Company is authorized to issue up to 22,913,543 new Class B Shares, corresponding to CHF 1,145,677.15 in par value.

 14

 

On January 19, 2016, the Company entered into a share subscription facility agreement (the "SSF") with GEM Global Yield Fund LLC SCS and GEM Investments America, LLC (collectively referred to as "GEM"), according to which the Company has the right, at any date after the date on which the Class B Shares are listed on the SIX, during the period expiring on the earlier of (i) January 19, 2021 and (ii) the date on which GEM has subscribed for Class B Shares with an aggregate subscription price of CHF 60,000,000, to request GEM, in one or several steps, to subscribe for Class B Shares up to an aggregate subscription amount of CHF 60,000,000. After drawdowns made under this facility in June, August and December 2017 in the aggregate amount of CHF 3,905,355, the remaining amount available for drawdown is CHF 56,094,645 as at December 31, 2020. The subscription price for each subscription request of the Company corresponds to 90% of the average of the closing bid prices for Class B Shares on the SIX (as adjusted for variations) as reported by Bloomberg during the respective pricing period. If the Company elects to exercise its rights under the SSF, the issuance of Class B Shares would dilute the Company's shareholders' interest in the Company. As at December 31, 2020, the remaining amount available for drawdown by the Company under the SSF is CHF 56,094,645 (USD 63,434,405 at closing rate) and the estimated maximum number of Class B Shares deliverable under the SSF is 50,856,432 Class B Shares at CHF 1.103 per Class B Share (calculated based on the closing price of a Class B Share on December 30, 2020 of CHF 1.225 per Class B Share, discounted by 10%). The actual price, at which the Company may drawdown under the SSF is subject to change, and, therefore, the number of Class B Shares deliverable to GEM may vary. On January 19, 2021, the SSF expired. The Company did not make any drawdown on the facility between January 1, 2021 and January 19, 2021.

 

In connection with the SSF, on May 06, 2016, the Company granted to GEM 1,459,127 options on Class B Shares (the "GEM Options") for the acquisition of an equal number of Class B Shares. The GEM Options may be exercised by GEM at any time on or before May 6, 2021, at an exercise price per GEM Option initially set to CHF 8.85432 per Class B Share (the "GEM Initial Exercise Price"). The GEM Initial Exercise Price may be adjusted using certain agreed-upon formulae more fully described in Item 10.C -- Material Contracts – Options Issued to GEM. In application of adjustment provisions under the relevant warrant, the exercise price of the warrant has been adjusted from CHF 8.85342 to CHF 8.8264 and the number of Class B Shares that GEM is entitled to purchase upon exercise of the warrant has been increased by 4,612 Class B Shares to 1,463,739 as at December 31, 2020. The Class B Shares issued to GEM in connection with the GEM Options would be issued out of the Company's conditional share capital or authorized share capital without triggering the pre-emptive rights of the existing shareholders of the Company. The exercise of GEM Options will dilute the Company's shareholders' interests in the Company.

 

On February 08, 2018, the Company entered into a Standby Equity Distribution Agreement, as amended on September 28, 2018 (the "SEDA") with YA II PN, Ltd., a fund managed by Yorkville Advisors Global, LLC (collectively referred to as "Yorkville"). Pursuant to the SEDA, the Company has the right, at any time during a five-year period, to request Yorkville, in one or several steps, to subscribe for Class B Shares up to an aggregate subscription amount of CHF 50,000,000. After several drawdowns made by WISeKey under the SEDA in 2018, 2019 and 2020, in the aggregate amount of CHF 3,992,169, the remaining amount available for drawdown is CHF 46,007,831 as at December 31, 2020. As long as a sufficient number of Class B Shares is provided through share lending, WISeKey has the right to make drawdowns under the SEDA at its discretion by requesting Yorkville to subscribe for (if the Class B Shares are issued out of authorized share capital) or purchase (if the Class B Shares are delivered out of treasury) Class B Shares worth up to CHF 5,000,000 each, subject to certain exceptions and limitations (including the exception that a drawdown request by WISeKey shall in no event cause the aggregate number of Class B Shares held by Yorkville to meet or exceed 4.99% of the total number of shares registered with the commercial register of the Canton of Zug). The subscription price for each subscription request of the Company corresponds to 93% of the lowest daily volume-weighted average share price (the "VWAP") of a Class B Share, as traded and quoted on the SIX, over the five trading days following the drawdown request by WISeKey. If the Company elects to exercise its rights under the SEDA, the issuance of Class B Shares would dilute the Company's shareholders' interest in the Company. As at December 31, 2020, the remaining amount available for drawdown by the Company under the SEDA is CHF 46,007,831 (USD 52,027,772 at closing rate) and, as at December 31, 2020, the estimated maximum number of Class B Shares deliverable under the SEDA is 40,393,178 Class B Shares at CHF 1.139 per Class B Share (calculated based on the closing price of a Class B Share on December 30, 2020 of CHF 1.225 per Class B Share, discounted by 7%). The actual price, at which the Company may drawdown under the SEDA is subject to change, and, therefore, the number of Class B Shares deliverable to Yorkville may vary.

 

 15

 

In connection with a convertible loan agreement WISeKey entered into with Crede CG III, Ltd., Hamilton, Bermuda ("Crede") on September 28, 2018 (which matured on October 30, 2020), the Company granted to Crede, on September 28, 2018, 408,247 options (the "Crede Options") for the acquisition of an equal number of Class B Shares. As a result, the maximum total number of Class B Shares that are issuable under the Crede Options as at December 31, 2020 is 408,247 Class B Shares. The Crede Options were amended on September 18, 2020 to extend the exercise period and may be exercised by Crede at any time on or before October 29, 2023 at an exercise price per Crede Option equal to CHF 3.84 per Class B Share. The Class B Shares issued to Crede in connection with the Crede Options would be issued out of the Company's conditional share capital or authorized share capital without triggering the pre-emptive rights of the existing shareholders of the Company. The exercise of Crede Options will dilute the Company's shareholders' interests in the Company.

 

In connection with a convertible loan agreement WISeKey entered into with YA II PN, Ltd., a fund managed by Yorkville (“Yorkville”) on June 27, 2019 (which matured on August 1, 2020), the Company granted to Yorkville, on June 27, 2019, 500,000 options (the "Yorkville Options") for the acquisition of an equal number of Class B Shares. As a result, the maximum total number of Class B Shares that are issuable under the Yorkville Options as at December 31, 2020 is 500,000 Class B Shares. The Yorkville Options may be exercised by Yorkville at any time on or before June 27, 2022, at an exercise price per Yorkville Option initially set to CHF 3.00 per Class B Share (the "Yorkville Initial Exercise Price"). The Yorkville Initial Exercise Price may be adjusted using certain agreed-upon formulae more fully described in Item 10C – Contracts – Options Issued to Yorkville. The Class B Shares issued to Yorkville in connection with the Yorkville Options would be issued out of the Company's conditional share capital or authorized share capital without triggering the pre-emptive rights of the existing shareholders of the Company. The exercise of Yorkville Options will dilute the Company's shareholders' interests in the Company.

 

On December 16, 2019, WISeKey entered into a Convertible Term Loan Facility Agreement (the “LSI Convertible Facility”) with Long State Investment Limited (“LSI”), a Hong Kong-based investment company, to borrow up to CHF 30,000,000 (the "LSI Principal Amount"). Under the terms of the LSI Convertible Facility, WISeKey is able to drawdown individual term loans of up to CHF 500,000 or, if so agreed between the parties, up to CHF 2,500,000 at an interest rate of 1.5% per annum (the "LSI Interest"), up to an aggregate amount of CHF 30,000,000 over a commitment period of 24 months. LSI have the right to convert a drawdown tranche into Class B Shares or, if so agreed among the parties and permitted by law, into ADSs, within a period of 21 SIX trading days after each individual drawdown at 95% of the higher of (i) the then prevailing market rate and (ii) the minimum conversion price of CHF 1.80. Any term loan not converted by LSI initially will automatically convert into Class B Shares, or ADSs, 20 SIX trading days before the expiration of the commitment period at the applicable conversion price. Under certain circumstances, interest payments may be “paid in kind” by capitalizing such interest and adding to it the aggregate principal balance of the loan outstanding. As at December 31, 2020, WISeKey has not made any drawdown under the LSI Convertible Facility, therefore the remaining amount available for drawdown is CHF 30,000,000. The conversion of the LSI Principal Amount and, if applicable, the LSI Interest, into Class B Shares will dilute the Company's shareholders' interest in the Company. The number of Class B Shares deliverable by the Company to LSI in connection with conversions of the LSI Principal Amount and the LSI Interest will depend on the applicable conversion price. As at December 31, 2020, the remaining amount available for drawdown by the Company under the LSI Convertible Facility is CHF 30,000,000 (USD 33,925,380 at closing rate) and, as at December 31, 2020, the estimated maximum number of Class B Shares deliverable under the LSI Convertible Facility is 17,543,860 Class B Shares at CHF 1.71 per Class B Share (calculated based on the higher of (i) the closing price of a Class B Share on the SIX on December 30, 2020 of CHF 1.225 per Class B Share and (ii) the minimum conversion price of CHF 1.80, discounted by 5%). Note that the actual price at which LSI may convert each tranche under the LSI Convertible Facility is subject to change, and, therefore, the number of Class B Shares deliverable to LSI may vary.

 

On March 04, 2020, WISeKey entered into a convertible loan agreement with Yorkville, pursuant to which Yorkville has committed to grant a loan to WISeKey in the amount of USD 4,000,000 (the "Yorkville Convertible Loan"). The Yorkville Convertible Loan will mature on April 30, 2021 ("Yorkville Maturity") and bear interest at a yearly rate of 6% ("Yorkville Interest"). The Yorkville Convertible Loan is to be repaid in cash in monthly instalments starting on March 30, 2020. However, Yorkville, in its sole and absolute discretion, may elect to convert any amount outstanding (principal and/or interests) into Class B Shares. The conversion price corresponds to the quotient of (i) the amount to be converted translated to CHF using the rate of exchange applicable on the date of the conversion, and (ii) a conversion price, initially set at CHF 3.00 per Class B Share but subject to adjustments under certain extraordinary circumstances. Yorkville did not effect any conversions in 2020. As at December 31, 2020 the remaining balance of the Yorkville Convertible Loan is USD 1,692,979.16. The conversion of the Yorkville Convertible Loan principal amount and, if applicable, the Yorkville Interest, into Class B Shares will dilute the Company's shareholders' interest in the Company. As at December 31, 2020, the remaining amount available for drawdown by the Company under the Yorkville Convertible Loan is USD 1,692,979.16 and, as at December 31, 2020, the estimated maximum number of Class B Shares deliverable under the Yorkville Convertible Loan is 507,431 Class B Shares at CHF 3.00 per Class B Share, assuming that the entire remaining amount of the Yorkville Convertible Loan (USD 1,692,979.16) would be converted in one step, together with all Yorkville Interest to be earned until the Yorkville Maturity. Note that the actual price at which Yorkville may convert each tranche under the Yorkville Convertible Loan is subject to change, and, therefore, the number of Class B Shares deliverable to Yorkville may vary.

 

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On May 18, 2020, WISeKey entered into an Agreement for the Issuance and Subscription of Convertible Notes (the “Nice & Green Facility”) with Nice & Green SA (“Nice & Green”), pursuant to which WISeKey has the right to draw down up to a maximum of CHF 10,000,000 in up to 25 tranches, each of which is divided into 25 convertible notes (the “Nice & Green Convertible Notes”), during a commitment period of 24 months commencing on May 20, 2020. The Nice & Green Convertible Notes do not bear interest. Subject to a cash redemption right of WISeKey, the Nice & Green Convertible Notes are mandatorily convertible into Class B Shares within a period of 12 months from issuance of the respective Nice & Green Convertible Notes (the “Nice & Green Conversion Period”). Conversion takes place upon request by Nice & Green during the Nice & Green Conversion Period, but in any case, no later than at the expiry of the Nice & Green Conversion Period, at a conversion price of 95% of the lowest daily volume-weighted average price of a Class B Share as traded on the SIX Swiss Exchange during the ten trading days preceding the relevant conversion date. WISeKey made several drawdowns in 2020 under the Nice & Green Facility and the remaining amount available for drawdown as at December 31, 2020 is CHF 1,083,111 (USD 1,224,832 at closing rate). The conversion of the drawdowns under the Nice & Green Facility into Class B Shares will dilute the Company's shareholders' interest in the Company. In 2020, Nice & Green requested to convert all Nice & Green Convertible Notes issued in 2020, therefore, as at December 31, 2020, there were no Nice & Green Convertible Notes outstanding. As at December 31, 2020, the remaining amount available for drawdown by the Company under the Nice & Green Facility is CHF 1,083,111 (USD 1,224,832 at closing rate) and, as at December 31, 2020, the estimated maximum number of Class B Shares deliverable under the Nice & Green Facility is 930,507 Class B Shares at CHF 1.164 per Class B Share (calculated based on the closing price of a Class B Share on the SIX on December 30, 2020 of CHF 1.225 per Class B Share discounted by 5%). Note that the actual price at which Nice & Green may convert each tranche under the Nice & Green Facility is subject to change, and, therefore, the number of Class B Shares deliverable to Nice & Green may vary.

 

On August 07, 2020, WISeKey entered into a convertible loan agreement (the “Crede Convertible Loan”) with Crede, pursuant to which Crede has committed to grant a loan to WISeKey in the amount of USD 5,000,000. The Crede Convertible Loan will mature on August 07, 2022 ("Crede Maturity") and bear interest at a yearly rate of 5% ("Crede Interest"). The Crede Convertible Loan is to be repaid at Crede Maturity by way of conversion into such number of Class B Shares as corresponds to the quotient of the (i) then outstanding Crede Convertible Loan and (ii) 92% of the lowest daily volume weighted average share prices of a Class B Share, quoted on the SIX Swiss Exchange during the ten trading days immediately preceding the relevant conversion date, converted into USD at the relevant exchange rate. Pursuant to the terms of the Crede Convertible Loan, the Company has the right, at its sole election, to pay interest accrued on the outstanding principal amount in cash or by delivery of such number of Class B Shares, determined in accordance with the aforementioned conversion methodology. Crede may effect the conversion of the Crede Convertible Loan any time before Crede Maturity. Crede effected several conversions in 2020. As at December 31, 2020, the remaining balance of the Crede Convertible Loan is USD 4,215,119.92. The conversion of the Crede Convertible Loan amount into Class B Shares will dilute the Company's shareholders' interest in the Company. As at December 31, 2020, the remaining amount available for drawdown by the Company under the Crede Convertible Loan is USD 4,215,119.92 and, as at December 31, 2020, the estimated maximum number of Class B Shares deliverable under the Crede Convertible Loan is 3,625,726 Class B Shares at CHF 1.274 per Class B Share, assuming that the entire remaining amount of the Crede Convertible Loan (USD 4,215,119.92) would be converted in one step, together with all Crede Interest to be earned until the Crede Maturity. Note that the actual price at which Crede may convert each tranche under the Crede Convertible Loan is subject to change, and, therefore, the number of Class B Shares deliverable to Crede may vary.

 

In connection with the Crede Convertible Loan, the Company granted to Crede, on August 07, 2020, 1,675,885 options (the "Second Crede Options") for the acquisition of an equal number of Class B Shares. As a result, the maximum total number of Class B Shares that are issuable under the Second Crede Options as at December 31, 2020 is 1,675,885 Class B Shares. The Second Crede Options may be exercised by Crede at any time on or before September 14, 2023 at an exercise price per option equal to CHF 1.375 per Class B Share, as amended. The Class B Shares issued to Crede in connection with the Second Crede Options would be issued out of the Company's conditional share capital or authorized share capital without triggering the pre-emptive rights of the existing shareholders of the Company. The exercise of the Second Crede Options will dilute the Company's shareholders' interests in the Company.

 

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On December 08, 2020, WISeKey entered into an Agreement for the Issuance and Subscription of Convertible Notes (the "GTO Facility") with GLOBAL TECH OPPORTUNITIES 8, Grand Cayman, Cayman Islands ("GTO") pursuant to which GTO committed to grant a loan to WISeKey by way of convertible notes (the “GTO Convertible Notes”), for up to a maximum amount of CHF 15,500,000, subject to certain conditions, over a period of 18 months. The GTO Convertible Notes do not bear any interest. Each GTO Convertible Note may be converted within a period of 12 months after its issuance (the “GTO Conversion Period”). Conversion takes place upon request by GTO during the GTO Conversion Period, but in any case no later than at the expiry of the GTO Conversion Period, into such number of Class B Shares as corresponds to the principal amount of the GTO Convertible Note divided by the higher of (i) CHF 0.05 and (ii) 97% of the lowest five trading day volume weighted average price of Class B Shares as traded on the SIX Swiss Exchange over the twenty trading days immediately preceding the relevant conversion date. The GTO Convertible Notes are only repayable in cash in an event of default under the terms of the GTO Facility or if WISeKey so elects. GTO made several subscriptions in 2020 under the GTO Facility and the remaining amount available for subscription as at December 31, 2020 is CHF 10,840,000 (USD 12,258,371 at closing rate). The conversion of the drawdowns under the GTO Facility into Class B Shares will dilute the Company's shareholders' interest in the Company. GTO requested to convert some but not all GTO Convertible Notes issued in 2020. As at December 31, 2020, GTO Convertible Notes in an aggregate amount of CHF 3,910,000 (USD 4,421,608 at closing rate) remained unconverted and the remaining amount available for subscription by the Company under the GTO Facility is CHF 10,840,000 (USD 12,258,371 at closing rate), therefore, as at December 31, 2020, the estimated maximum number of Class B Shares deliverable under the GTO Facility is 12,415,824 Class B Shares at CHF 1.188 per Class B Share (calculated based on the closing price of a Class B Share on the SIX on December 30, 2020 of CHF 1.225 per Class B Share discounted by 3%). Note that the actual price at which GTO may convert each tranche under the GTO Facility is subject to change, and, therefore, the number of Class B Shares deliverable to GTO may vary.

 

In connection with the GTO Facility, the Company granted GTO the option to acquire Class B Shares at an exercise price of the higher of (a) 120% of the 5-trading day VWAP of the Class B Shares on the SIX Swiss Stock Exchange over the 5 trading days immediately preceding the relevant subscription request and (b) CHF 1.50 (the “GTO Option Exercise Price”). The number of options granted at each tranche subscription is calculated as 15% of the principal amount of each subscription divided by the GTO Option Exercise Price. Each option agreement has a 5-year exercise period starting on the relevant subscription date. As at December 31, 2020, a total of 466,000 options (the "GTO Options") for the acquisition of an equal number of Class B Shares. As a result, the maximum total number of Class B Shares that are issuable under the GTO Options as at December 31, 2020 is 466,000 Class B Shares. The GTO Options may be exercised by GTO at any time until the fifth anniversary of their respective grant at the GTO Option Exercise Price. Should the remaining amount available for subscription by the Company under the GTO Facility of CHF 10,840,000 (USD 12,258,371 at closing rate) be subscribed for, the estimated maximum number of options deliverable under the GTO Facility is 7,226,666 for the acquisition of an equal number of Class B Shares. As a result, assuming the GTO Facility is fully subscribed for, the maximum total number of Class B Shares that are issued and issuable under the GTO Facility as at December 31, 2020 is 7,692,666 Class B Shares (the “Total GTO Options”). The Class B Shares issued to GTO in connection with the Total GTO Options would be issued out of the Company's conditional share capital or authorized share capital without triggering the pre-emptive rights of the existing shareholders of the Company. The exercise of the Total GTO Options will dilute the Company's shareholders' interests in the Company. Note that the actual GTO Warrant Exercise Price at each subscription used to calculate the number of options granted to GTO is subject to change, and, therefore, the number of Class B Shares deliverable to GTO may vary.

 

Our financial results may be affected by fluctuations in exchange rates.

 

Due to the broad scope of our international operations, a portion of our revenue and our expenses are denominated in currencies other than USD, our reporting currency. As a result, our business is exposed to transactional and translational currency exchange risks caused by fluctuations in exchange rates among those different currencies.

 

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The functional currency of most of our operating subsidiaries is the applicable local currency. The translation from the applicable functional currencies into our reporting currency is performed for balance sheet accounts using exchange rates in effect at the balance sheet date, and, for the statement of operations accounts, using average exchange rates prevailing during the relevant period. Functional currency exchange rates for our operating subsidiaries have in the past, and may in the future, fluctuate significantly against the USD. Because we prepare our consolidated financial statements in USD, these fluctuations may have an effect both on our results of operations and on the reported value of our assets, liabilities, revenue and expenses as measured in USD, which in turn may significantly affect reported earnings, either positively or negatively, and the comparability of period-to-period results of operations.

 

In addition to currency translation risks, we are exposed to currency transaction risks. Currency transaction risk is the risk that the domestic currency value of a future foreign currency denominated cash flow (payments or receipts from a committed or uncommitted contract or credit facility) varies as a direct result of changes in exchange rates. Fluctuations in currencies may adversely impact our ability to compete on a global basis and our results of operations and our financial condition.

 

Our operating results can vary significantly due to the impairment of goodwill and other tangible and intangible assets due to changes in the business environment.

 

Our operating results can also vary significantly due to impairments of intangible assets, including goodwill, and other fixed assets. As at December 31, 2020, the value of our goodwill as recorded on our balance sheet was USD 8,316,892 and the value of acquired technologies and other intangible assets was USD 8,900, net of impairment and amortization. Because the market for our products is characterized by rapidly changing technologies, our future cash flows may not support the value of goodwill and other intangibles recorded in our consolidated financial statements. According to U.S. GAAP, we are required to annually test our recorded goodwill and indefinite-lived intangible assets, if any, and to assess the carrying values of other intangible assets when impairment indicators exist. As a result of such tests, we could be required to book impairment charges in our statement of operations if the carrying value is greater than the fair value. The amount of any potential impairment is not predictable.

 

Factors that could trigger an impairment of such assets include, but are not limited to, the following:

 

·underperformance relative to projected future operating results;

 

·negative industry or economic trends, including changes in borrowing rates or weighted average cost of capital;

 

·applicable tax rates;

 

·changes in working capital;

 

·the market multiples utilized in our fair value calculations;

 

·changes in the manner or use of the acquired assets or the strategy for our overall business; and

 

·changes in our organization or management reporting structure, which could require greater aggregation or disaggregation in our analysis by reporting unit and potentially alternative methods/ assumptions of estimating fair values.

 

Any potential future impairment, if required, could have a material adverse effect on our business, financial condition and results of operations.

 

We may need additional capital in the future and it may not be available on terms favorable to us or at all.

 

We may require additional capital in the future to do, among other things, the following:

 

·fund our operations;

 

·finance investments in equipment and infrastructure needed to maintain our manufacturing capabilities;

 

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·enhance and expand the range of products and services we offer;

 

·respond to potential strategic opportunities, such as investments, acquisitions and expansions; and

 

·service or refinance other indebtedness.

 

Our ability to obtain external financing in the future is subject to a variety of uncertainties, including: (i) our financial condition, results of operations and cash flows, and (ii) general market conditions for financing activities.

 

The terms of available financing may also restrict our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could have a material adverse effect on our business, financial condition and results of operations.

 

The Company is a holding company with no direct cash generating operations and relies on its subsidiaries to provide it with funds necessary to pay dividends to shareholders.

 

The Company is a holding company with no significant assets other than the equity interests in its subsidiaries. The Company's subsidiaries own substantially all the rights to its revenue streams. The Company has no legal obligation to, and may not, declare dividends or other distributions on its shares. The Company's ability to pay dividends to its shareholders depends on the availability of sufficient legally distributable profits from previous years, which depends on the performance of its subsidiaries and their ability to distribute funds to the Company, and/or on the availability of distributable reserves from capital contributions at the Company level, and on the need for shareholder approval.

 

The ability of a subsidiary to make distributions to the Company could be affected by a claim or other action by a third party, including a creditor, or by laws which regulate the payment of dividends by companies. In addition, the subsidiaries' ability to distribute funds to the Company depends on, among other things, the availability of sufficient legally distributable profit of such subsidiaries. The Company cannot offer any assurance that legally distributable profit or reserves from capital contributions will be available in any given financial year.

 

Even if there is sufficient legally distributable profit or reserves from capital contributions available, the Company may not be able to pay a dividend or distribution of reserves from capital contributions for a variety of reasons. Payment of future dividends and other distributions will depend on our liquidity and cash flow generation, financial condition and other factors, including regulatory and liquidity requirements, as well as tax and other legal considerations.

 

Legal Risks

 

We are subject to anti-takeover provisions.

 

Our Articles and Swiss law contain provisions that could prevent or delay an acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions may also adversely affect prevailing market prices for our Class B Shares and our ADSs. These provisions provide, among other things:

 

·an opting-out from the obligation of an acquirer of Shares to make a public offer pursuant to article 135 and 163 of the Swiss Financial Market Infrastructure Act, including its implementing directives, circulars and other regulations (the "FMIA");

 

·that the share capital is divided into different classes of shares, of which only Class B Shares are listed on the SIX, whereas Class A Shares are not listed and tradable;

 

·that the Board is currently authorized, at any time until January 28, 2023, to issue up to 25,313,5432 new Class B Shares and to limit or withdraw the pre-emptive rights of existing shareholders in various circumstances;

 

_____________________________

2 As approved at the extraordinary general meeting held on January 28, 2021.

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·that any shareholder who is entitled to propose any business or to nominate a person or persons for election as member of the Board at an annual meeting may only do so if advance notice is given to the Company;

 

·that a merger or demerger transaction requires the affirmative vote of the holders of at least two-thirds of voting rights and an absolute majority of the par value of the shares, each as represented (in person or by proxy) at the general meeting of shareholders and the possibility of a so-called "cash-out" or "squeeze-out" merger if the acquirer controls 90% of the outstanding shares entitled to vote at a general meeting of shareholders; and

 

·that any action required or permitted to be taken by the holders of shares must be taken at a duly called annual or extraordinary general meeting of shareholders of the Company.

 

Each Class A Share and each Class B Share has one vote despite the difference in par value

 

Each Class A Share and each Class B Share carries one vote per share but our Class A Shares have a lower par value (CHF 0.01 per share) than our Class B Shares (CHF 0.05 per share). This means that, relative to their respective per share contribution to the Company’s capital, the holders of our Class A Shares have a greater relative per share voting power than the holders of our Class B Shares for matters that require approval on the basis of a specified majority of shares present at the shareholders meeting.

 

However, to the extent shareholder resolutions require as the relevant majority standard a majority of the par value of the shares present at the meeting, Class A Shares as a class have less votes than Class B Shares as a class (as the Class B Shares have a par value of CH 0.05 per Class B Share as compared to CH 0.01 per Class A Share). The majority of par value standard for approval of resolutions applies (i) to shareholder resolutions on certain specific matters (see Item 10B -Memorandum and Articles of Association - Dual Voting Rights) and (ii) to the extent that Swiss corporate law requires that a shareholder resolution be adopted with a majority of (A) two-thirds of the voting rights attached to, and (B) the absolute majority of the par value of, the shares, each as represented at the relevant meeting (see also Item 10B-Memorandum and Articles of Association - Voting Requirements). 

 

Assuming a total of approximately 87.6 million of our shares are issued (in line with the commercial register of the Canton of Zug as at December 31, 2020), of which approximately 40.0 million are Class A Shares and approximately 47.6 million are Class B Shares, the Class A Shares as a class contribute approximately 14% of the aggregate par value of the Company, have 46% of the total votes for matters that require approval on the basis of a specified majority of the number of shares present or represented at the shareholders meeting, but 14% of the total votes for matters that require approval on the basis of a specified majority of the par value of the shares present at the shareholders meeting. Assuming the same total of approximately 87.6 million of our shares are issued, of which approximately 40.0 million are Class A Shares and approximately 47.6 million are Class B Shares, Class B Shares as a class contribute 86% of the aggregate par value of the Company, have 54% of the total votes for matters that require approval on the basis of a specified majority of the number of shares present or represented at the shareholders meeting, but 86% of the total votes for matters that require approval on the basis of a specified majority of the par value of the shares present at the shareholders meeting.

 

A change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate, including tax rules limiting the deductibility of interest expense, could result in a higher tax rate on our earnings, which could result in a significant negative impact on our earnings and cash flows from operations.

 

We operate in various jurisdictions. Consequently, we are subject to changes in applicable tax laws, treaties or regulations in the jurisdictions in which we operate, which could include laws or policies directed toward companies organized in jurisdictions with low tax rates. A material change in the tax laws or policies, or their interpretation, of any country in which we have significant operations, or in which we are incorporated or resident, including the limitation of deductibility of interest expense, could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results.

 

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We may become exposed to costly and damaging intellectual property or liability claims, and our product liability may not cover all damages from such claims.

 

We are exposed to potential intellectual property or product liability claims. We currently have not been involved in any such legal proceedings. However, the current and future use of our products may expose us to such claims. Any claims made against us, regardless of their merit, could be difficult and costly to defend, and could compromise the market acceptance of our products and any prospects for future products. Such legal proceedings could have a material adverse effect on our business, financial condition, or results of operations.

 

If WISeKey is unable to adequately protect its proprietary technology and intellectual property rights, its business could suffer substantial harm.

 

Our intellectual property rights are important to our business. We rely on a combination of confidentiality clauses, trade secrets, copyrights and trademarks to protect our intellectual property and know-how. In addition, we have filed a number of applications for patents to protect our technologies and have been granted two patents in Switzerland for the company's verification and authentication of valuable objects on the Internet in connection with technology involving the internet of things ("IoT") when connecting to each other or to the cloud. Further, in connection with the acquisition of WISeKey Semiconductors SAS from Inside Secure SA, we have acquired 39 patent families.

 

The steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create solutions and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our solutions may be unenforceable under the laws of certain jurisdictions.

 

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to our proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions. Additionally, we may from time to time be subject to opposition or similar proceedings with respect to applications for registrations of our intellectual property, including but not limited to our trademarks and patent applications. While we aim to acquire adequate protection of our brand through registrations in key markets, occasionally third parties may have already registered or otherwise acquired rights to identical or similar brands for solutions that also address the cybersecurity, authentication or mobile application markets. Additionally, the process of seeking patent protection can be lengthy and expensive. Any of our pending or future patent or trademark applications, whether challenged or not, may not be issued with the scope of the claims we seek, if at all.

 

From time to time, we may discover that third parties are infringing, misappropriating or otherwise violating our intellectual property rights. However, policing unauthorized use of our intellectual property and misappropriation of our technology is difficult and we may therefore not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop solutions with the same or similar functionality as our solutions. If competitors infringe, misappropriate or otherwise misuse our intellectual property rights and we are not adequately protected, or if such competitors are able to develop solutions with the same or similar functionality as ours without infringing our intellectual property, our competitive position and results of operations could be harmed and our legal costs could increase.

 

WISeKey may incur fines or penalties, damage to its reputation or other adverse consequences if its employees, agents or business partners violate, or are alleged to have violated, anti-bribery, competition or other laws.

 

WISeKey's internal controls may not always protect us from reckless or criminal acts committed by our employees, agents or business partners that would violate Swiss, U.S. or other laws, including anti-bribery, competition, trade sanctions and regulations and other related laws. Any such improper actions could subject WISeKey to administrative, civil or criminal investigations in the competent jurisdictions, could lead to substantial civil or criminal monetary and non-monetary penalties against WISeKey or our subsidiaries, and could damage our reputation. Even the allegation or appearance of WISeKey's employees, agents or business partners acting improperly or illegally could damage our reputation and result in significant expenditures in investigating and responding to such actions.

 

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We could be subject to litigation that, if not resolved in our favor and not sufficiently insured against, could have a material adverse effect on us.

 

As WISeKey continues to expand products, partnerships, sales and distribution, the risk of being involved in legal proceedings will invariably increase. While WISeKey has successfully avoided being involved in legal proceedings in the past, it may not be able to do so in the future. Legal proceedings, especially when involving intellectual property rights and product liability, may have material adverse effects on WISeKey's financial condition, results of operations and cash flows.

 

We process and store personal information, which subjects us to data protection laws and contractual commitments, and our actual or perceived failure to comply with such laws and commitments could harm our business.

 

The personal information we process is subject to an increasing number of laws regarding privacy and data protection, as well as contractual commitments. Any failure or perceived failure by us to comply with such obligations may result in governmental enforcement actions, fines, or cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

 

Risks Related to Our Shares and ADSs

 

As a foreign private issuer, we are permitted to rely on exemptions from certain corporate governance standards.

 

As a foreign private issuer, we are permitted to, and we are relying on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ADSs.

 

We are exempted from certain corporate governance requirements of NASDAQ by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on NASDAQ. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:

 

·have a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the "Exchange Act");

 

·have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors; or

 

·have regularly scheduled executive sessions with only independent directors.

 

We have relied on and intend to continue to rely on some of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of NASDAQ.

 

As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders and ADS holders than they would enjoy if we were a domestic U.S. company.

 

As a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act. In addition, our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act. As a result, our shareholders and ADS holders may be afforded less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.

 

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We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

 

As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. In order to maintain our current status as a foreign private issuer, either (a) a majority of our common shares must be either directly or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors may not be United States citizens or residents, (ii) more than 50 percent of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. These criteria are tested annually. If we lost this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and stock exchange rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time-consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors.

 

We are an "emerging growth company", and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies may make the ADSs less attractive to investors and, as a result, adversely affect the price of the ADSs and result in a less active trading market for the ADSs.

 

We are an "emerging growth company" as defined in the U.S. Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. For example, we have elected to rely on an exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act relating to internal control over financial reporting, and we will not provide such an attestation from our auditors. We may avail ourselves of these disclosure exemptions until we are no longer an emerging growth company. We cannot predict whether investors will find the ADSs less attractive because of our reliance on some or all of these exemptions. If investors find the ADSs less attractive, it may adversely affect the price of the ADSs and there may be a less active trading market for the ADSs.

 

We will cease to be an emerging growth company upon the earliest of:

 

·the last day of the fiscal year during which we have total annual gross revenues of USD 1,070,000,000 (as such amount is indexed for inflation every five years by the United States Securities and Exchange Commission, or SEC) or more;

 

·the last day of our fiscal year following the fifth anniversary of the completion of our first sale of common equity securities pursuant to an effective registration statement under the Securities Act;

 

·the date on which we have, during the previous three-year period, issued more than USD 1,070,000,000 in non-convertible debt; or

 

·the date on which we are deemed to be a "large accelerated filer", as defined in Rule 12b-2 of the Exchange Act, which would occur if the market value of our ordinary shares and ADSs that are held by non-affiliates exceeds USD700,000,000 as of the last day of our most recently-completed second fiscal quarter.

 

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Depending on the circumstances, we may or may not take advantage of the extended transition period under Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards and therefore our financial statements may not be comparable to companies that comply with public company effective dates.

 

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The requirements of being a public company may strain our resources and distract our management.

 

Following the listing of the ADSs on NASDAQ, we are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us, either or both of which could have a negative effect on our business, financial condition and results of operations.

 

As a public company, we are (subject to certain exceptions) subject to the reporting requirements of the Exchange Act and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act and the listing and other requirements of NASDAQ. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial performance. The Sarbanes-Oxley Act requires that we maintain disclosure controls and procedures and internal control over financial reporting. To improve the effectiveness of our disclosure controls and procedures and our internal control over financing reporting, we need to commit significant resources and provide additional management oversight. We are implementing additional procedures and processes for the purpose of addressing the U.S. standards and requirements applicable to public companies. These activities may divert management's attention from other business concerns and we will incur significant legal, accounting and other expenses that we did not have prior to the listing on NASDAQ, which could have a material adverse effect on our business, financial condition and results of operations.

 

We have never paid dividends on our share capital, and we do not anticipate paying cash dividends in the foreseeable future.

 

We have never declared or paid cash dividends on our share capital. We do not anticipate paying cash dividends on our shares in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with applicable laws and covenants under current or future credit facilities, which may restrict or limit our ability to pay dividends and will depend on our financial condition, operating results, capital requirements, distributable profits and/or distributable reserves from capital contributions, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our securities will be your sold source of gain for the foreseeable future.

 

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiffs in any such action.

 

The deposit agreement governing the ADSs representing our Class B Shares provides that, to the fullest extent permitted by applicable law, ADSs holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our Class B Shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. The waiver to right to a jury trial of the deposit agreement is not intended to be deemed a waiver by any holder or beneficial owner of ADSs of our or the depositary's compliance with the U.S. federal securities laws and the rules and regulations promulgated thereunder.

 

If we or the depositary oppose a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. The enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

 

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcome than a trial by jury would have had, including results that could be less favorable to the plaintiffs in any such action.

 

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Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or our ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

 

Your voting rights as a holder of our ADSs are limited by the terms of the deposit agreement.

 

You may exercise your voting rights with respect to the ordinary shares underlying your ADSs only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from you in the manner set forth in the deposit agreement, the depositary for our ADSs will endeavor to vote your underlying ordinary shares in accordance with these instructions. When a general meeting is convened, you may not receive sufficient notice of a shareholders' meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. As a result, you may not be able to exercise your right to vote.

 

The depositary for our ADSs will give a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not give timely voting instructions, except in limited circumstances, which could adversely affect your interests.

 

Under the deposit agreement for our ADSs, the depositary will, to the extent permitted under applicable law, give a discretionary proxy to the independent proxy holder elected by the Company's shareholders to exercise the voting rights of the ordinary shares underlying your ADSs at shareholders' meetings if you do not give voting instructions to the depositary, unless:

 

·we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

·we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting; or

 

·a matter to be voted on at the meeting would have a material adverse impact on shareholders.

 

The effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary, you cannot prevent the ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence our management.

 

You may be subject to limitations on transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

You may not receive distributions on our Class B Shares or any value for them if it is illegal or impractical to make them available to you as an ADS holder.

 

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for the Class B Shares represented by ADSs after deducting its fees and expenses. You will receive these distributions in proportion to the number of our Class B Shares that your ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, Class B Shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our Class B Shares or any value for them if it is illegal or impractical for us to make them available to you as an ADS holder. These restrictions may reduce the value of your ADSs.

 

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The rights accruing to holders of our shares may differ from the rights typically accruing to shareholders of a U.S. corporation.

 

We are organized under the laws of Switzerland. The rights of holders of Class B Shares and, therefore, certain of the rights of ADSs, are governed by the laws of Switzerland and by our Articles of Association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. See the sections entitled "Description of Share Capital and Articles of Association – Differences in Corporate Law" and "Description of Share Capital and Articles of Association – Articles of Association – Other Swiss Law Considerations" for a description of the principal differences between the provisions of Swiss law applicable to us and, for example, the Delaware General Corporation Law relating to shareholders' rights and protections.

 

Claims of U.S. civil liabilities may not be enforceable against us.

 

We are incorporated under the laws of Switzerland. Certain of our directors reside outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce judgments obtained in U.S. courts against them or us, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. The United States and Switzerland do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment given by a court in the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in Switzerland. In addition, uncertainty exists as to whether Swiss courts would entertain original actions brought in Switzerland against us or our directors predicated upon the securities laws of the United States or any state in the United States. Any final and conclusive monetary judgment for a definite sum obtained against us in U.S. courts would be reviewed by the courts of Switzerland. Whether these requirements are met in respect of a judgment based upon the civil liability provisions of the U.S. securities laws, including whether the award of monetary damages under such laws would constitute a penalty, is an issue for the court making such decision. If a Swiss court gives judgment for the sum payable under a U.S. judgment, the Swiss judgment will be enforceable by methods generally available for this purpose. These methods generally permit the Swiss court discretion to prescribe the manner of enforcement. As a result, U.S. investors may not be able to enforce against us or certain of our directors, or certain experts named herein who are residents of Switzerland or countries other than the United States, any judgments obtained in U.S.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of ADSs or our Class B Shares.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. Inadequate internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our ADSs or our Class B Shares.

 

Management will be required to assess the effectiveness of our internal controls annually. However, for as long as we are an "emerging growth company", our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting. An independent assessment of the effectiveness of our internal controls could detect problems that our management's assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements requiring us to incur the expense of remediation and could also result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

 

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If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our ADSs or our Class B Shares and their respective trading volumes could decline.

 

The trading market for our ADSs and our Class B Shares depends in part on the research and reports that securities or industry analysts publish about us or our business. Since we have not undertaken an initial public offering of ADSs in connection with the listing of our ADSs on NASDAQ, we do not anticipate that many or any industry analysts in the United States will publish such research and reports in the United States about our Class B Shares or our ADSs. If no or too few securities or industry analysts commence or continue coverage on us, the trading price for our ADSs and our Class B Shares could be affected. If one or more of the analysts who may eventually cover us downgrade our ADSs or our Class B Shares or publish inaccurate or unfavorable research about our business, the trading price of our ADSs or our Class B Shares would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our ADSs or Class B Shares could decrease, which might cause the price of such securities and their respective trading volumes to decline.

 

Although we believe that we were not a "passive foreign investment company," or PFIC, for U.S. federal income tax purposes in 2020, there can be no assurance in this regard, and if we are a PFIC in any year, U.S. holders of our ADSs may be subject to adverse U.S. federal income tax consequences.

 

Under the Internal Revenue Code of 1986, as amended, or the Code, we will be a PFIC for any taxable year in which, after the application of certain look-through rules with respect to subsidiaries, either (i) 75% or more of our gross income consists of passive income or (ii) 50% or more of the average quarterly value of our assets consists of assets that produce, or are held for the production of, passive income. Based on our financial statements, business plan and certain estimates and projections, including as to the relative values of our assets, we do not believe that we were a PFIC for our 2020 taxable year and do not expect to be a PFIC in the foreseeable future. However, there can be no assurance that the Internal Revenue Service (the "IRS") will agree with our conclusion regarding our PFIC status, and whether we are or will be classified as a PFIC in any particular year is uncertain because we currently own a substantial amount of passive assets, including cash, and the valuation of certain of our assets is uncertain and may vary substantially over time. Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.

 

If we are a PFIC for any taxable year during which a U.S. investor holds ADSs, we generally would continue to be treated as a PFIC with respect to that U.S. investor for all succeeding years during which the U.S. investor holds ADSs, even if we ceased to meet the threshold requirements for PFIC status. Such a U.S. investor may be subject to adverse U.S. federal income tax consequences, including (i) the treatment of all or a portion of any gain on disposition as ordinary income, (ii) the application of a deferred interest charge on such gain and the receipt of certain dividends and (iii) compliance with certain reporting requirements. We do not intend to provide the information that would enable investors to make a qualified electing fund election that could mitigate the adverse U.S. federal income tax consequences should we be classified as a PFIC.

 

For further discussion, see "Taxation—Material U.S. Federal Income Tax Considerations for U.S. Holders."

 

If a United States person is treated as owning at least 10% of our shares or ADSs, such holder may be subject to adverse U.S. federal income tax consequences.

 

If a U.S. investor owns or is treated as owning (indirectly or constructively) at least 10% of the value or voting power of our shares or ADSs, such investor may be treated as a "United States shareholder" with respect to each "controlled foreign corporation" in our group (if any). Because our group includes a U.S. subsidiary, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether or not we are treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of "Subpart F income," "global intangible low-taxed income," and investments in U.S. property by controlled foreign corporations, regardless of whether we make any distributions. Failure to comply with these reporting obligations may subject a United States shareholder to significant monetary penalties and may prevent the statute of limitations with respect to such shareholder's U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries is treated as a controlled foreign corporation or whether any investor is treated as a United States shareholder with respect to any such controlled foreign corporation or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A United States investor should consult its advisors regarding the potential application of these rules to an investment in our ADSs.

 

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Item 4.Information on the Company

 

A.History and Development of the Company

 

We are a Swiss stock corporation (Aktiengesellschaft) of unlimited duration with limited liability under the laws of Switzerland and registered in the Commercial Register of the Canton of Zug, Switzerland, on December 3, 2015 under the register number CHE-143.782.707. We are registered under the company name "WISeKey International Holding AG" and have our registered office and principal executive offices at General-Guisan-Strasse 6, 6300 Zug, Switzerland. WISeKey International Holding AG is the parent company of WISeKey SA, which was established in 1999. Our address on the Internet is http://www.wisekey.com. The information on our website is not incorporated by reference in this annual report.

 

In the first quarter of 2019, we completed the sale of the QuoVadis Group to DigiCert Inc, a leading global provider of TLS/SSL, IoT and other PKI solutions, for USD 45 million cash. The products and solutions of the QuoVadis Group sold to DigiCert Inc. consisted of QuoVadis Trust/Link which provides managed Public Key Infrastructure (PKI) including Digital Certificates for authentication, encryption, and digital signature; TLS/SSL Certificates for websites; QuoVadis sealsign which provides software and cloud solutions for Electronic Signatures and time-stamping. We retained ownership of the ISTANA Platform used to secure, among other things, the connected car industry, as part of its offerings for the Internet of Things (IoT) market, together with its latest Blockchain technology. The ISTANA Platform complements our core products and solutions which are based on our Cybersecurity SaaS business, also known as managed PKI services, and on our Semiconductor chips, and focus on securing the IoT market and using Artificial Intelligence (AI) to analyze data, with products and services using public key encryption and hardware encryption, digital identity protection services, anti-illicit trade products and services, and Blockchain services.

 

In January 2021, we completed the first phase of the acquisition of arago GmbH (“arago”) by acquiring a controlling interest in arago. arago is a leading German technology company that provides Artificial Intelligence (“AI”) to enterprises globally through knowledge automation. On November 18, 2020, the Company signed a convertible loan agreement with arago to acquire, through conversion of a CHF 5 million loan and guaranteeing arago’s existing indebtedness, a controlling interest of 51% in arago (see Note 10 of our consolidated financial statement as at December 31, 2020). On January 18, 2021, we requested to convert the loan into 51% of arago’s share capital carrying 51% of the voting rights (see Note 40 of our consolidated financial statement as at December 31, 2020).

 

The acquisition of a controlling interest in arago is the initial step in an overall transaction which would lead to a combination of the businesses of WISeKey and arago. As per the terms of a non-binding term sheet between WISeKey and the shareholders of arago, the combination would be completed through the issuance by WISeKey of new Class B shares to arago’s remaining minority shareholder against contribution by arago’s minority shareholder of the remaining arago shares to WISeKey. arago’s remaining shareholder would then hold a significant minority stake in WISeKey. The transaction is subject to the parties agreeing on definitive agreements, including the respective relative valuations. The term sheet contemplates that arago's shareholders would hold up to 12,327,506 Class B Shares. The subsequent completion of definitive agreements would, among other things, be conditional upon obtaining the required regulatory and other standard authorizations.

 

The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements, and other information regarding issuers that file electronically with the SEC.

 

B.Business Overview

 

Overview

 

We are a Swiss cybersecurity company, publicly listed in Switzerland on the SIX since 2016 (Class B Shares) and NASDAQ, since 2019 (American Depositary Shares), focused on delivering integrated security solutions for the Internet of Things (IoT) and digital identity ecosystems. In addition, with recently acquired assets, WISeKey is evolving to now include secure knowledge automation fueled by artificial intelligence. With over two decades of experience in the digital security market, we integrate our secure semiconductors, cybersecurity software, and a globally recognized Root of Trust (RoT) into leading-edge products and services that protect users, devices, data and transactions in the internet-connected world. Taking this trusted foundation, WISeKey intends to integrate the arago AI and data platform and wrap it with a cybersecurity layer to deliver Trusted Knowledge Automation via a cloud-based Software as a Service (“SaaS”) offering designed for an uncertain cyberthreat environment. This unique combination of data, AI, and trust technologies is intended to enable organizations worldwide to digitize their business operations.

 

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The rapid proliferation of internet-connected devices and individuals' increasing dependence on them for personal and business purposes have exposed shortcomings in traditional security solutions. Legacy IT networks are easy targets for attackers that leverage the vulnerabilities of the outdated perimeter-based security methods that cannot keep up with the sheer number of devices that are being added every day. Our cybersecurity platform is the first of its kind to be intentionally designed to provide organizations with a holistic cybersecurity solution to safeguard their connected device ecosystem from the evolving cyber threats that lurk around every corner of the burgeoning Internet of Things (IoT) landscape. In addition to the cybersecurity risks, IT operations are traditionally lacking in efficiency and automation. The rise of Robotic Process Automation (RPA) has started to improve efficiency with automation but suffers from limitations. With the traditional deterministic model, scalability plateaus too quickly and this where our cybersecure knowledge automation can take over and elevate the current landscape to achieve significantly greater automation rates and operational efficiency.

 

Cyber-attacks are becoming increasingly sophisticated, posing significant and persistent threats to international organizations and the sensitive data that they are responsible to protect under government regulations such as GDPR. Attackers deploy clandestine, advanced, and targeted attacks on less secure bring-your-own-devices (BYOD) to infiltrate broader networks. These attacks can remain inside a network for extended periods of time undetected, most often to steal valuable data, spread malicious malware, or sabotage critical infrastructure. The proliferation of the IoT and the increase in connected devices is driving the severity of these risks up. As more devices are connected, more data is shared and as more data is shared, there are more points of vulnerability. Being able to secure these points of vulnerability is critical to the success of business and data communications future. The World Economic Forum said, in an article published in November of 2019, that Cybercrime will remain a large-scale concern for years to come. From 2019 to 2023E, approximately $5.2 trillion in global value will be at risk from cyberattacks, creating an ongoing challenge for corporations and investors alike3. With these cyber-risks, business process automation can be cumbersome and difficult and often requires on-premise implementation in order to limit risk and exposure. This creates inefficiencies, limits the upside and still does not close the gap on all data vulnerabilities.

 

In the context of cybersecurity, a major concern is not just the risk of exposing data to bad actors, but also the actions and decisions that are made based on the data and that cannot take place if the data cannot be trusted. As a result, conceptually in terms of data classes, some data can be trusted to take a particular action and other data cannot. If data is categorized as "Untrusted Data", where the identity of a device or data source is not known, the network security is low or the data integrity cannot be validated, that data is flagged as untrusted. So-called "Secure Data" on the other hand stems from devices and data sources with trusted identities and data validation processes, inherently part of a Public Key Infrastructure (PKI), generating "Trusted Data" that can trigger reliable actions, transactions and processes. As more and more applications rely on immediate actions, like the decision for a drone to complete its delivery, the need for Secure Data becomes critical for safety and security and it can only derive from secure, trusted IoT ecosystems. This is the entire intent behind Trusted Knowledge Automation which is to be able to make real-time decisions based on Secure Data.

 

WISeKey believes that, with arago, we are in a space alone, combining secure IoT microchips with proven cybersecurity software and services and offering that as a wrapper for Knowledge Automation which can now be provided in a cloud-based SaaS environment due to the security and secure data communications. Simply put, devices and data sources that are deployed without the security provided by our platform are exposed and lack the mission-critical security systems to defend themselves and the networks they are connected to. Our security solutions are therefore at the forefront of cybersecurity innovation, driving the future of IoT and IT security as the most comprehensive way to fill all gaps in identity and data protection, giving organizations the confidence that they are protected from device-to-cloud and beyond. This is also the foundation by which we can supply Trusted Knowledge Automation with secure data entering the applicable system. This decreases the volume of necessary data in order to make automated and informed decisions which improves the time to market for businesses to implement knowledge automation.

 

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3 Ghosh, I, ‘This is the crippling cost of cybercrime on corporations’, World Economic Forum, November 7, 2019.

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Our cybersecurity and automation platform is comprised of our proprietary software and hardware products that have been designed from the ground up to address the unique attack parameters that threaten the IoT and data ecosystem:

 

·Hardware - Our unique position as one of only six companies worldwide capable of designing and deploying secure microchips that have been certified by globally recognized security certification boards like Common Criteria, Cybersecurity and Infrastructure Security Agency and FIPS (Federal Information Processing Standards) gives us the advantage of being able to provide our clients with the highest level of digital security available on the market at this time. Our secure microchips, typically referred to as Secure Elements, have been embedded into billions of devices and are trusted to secure drone, enterprise, government, and medical-grade applications.

 

·Software - Our software solutions are driven by proprietary technologies based on widely adopted standards such as Root of Trust (RoT) and Public Key Infrastructure (PKI), that enable our clients to effectively manage their digital identities, information, and communications through a single integrated platform. RoT enables us to secure electronic information through our PKI digital certificate technology. These digital certificates are deployed for mutual authentication and encryption, creating tamperproof electronic "fingerprints", allowing our clients to adapt to an always changing device landscape without compromising their digital security and integrity. This security is then wrapped around our cloud-based knowledge automation platform which enables the automation of decisions for IT operations, financial operations, IoT applications, and more.

 

Market Opportunities

 

Our security and automation solutions address the complex needs of global enterprises and organizations. Our customers include leading organizations in a diverse set of industries, including energy and utilities, financial services, healthcare, manufacturing, retail, technology, IT operations and telecommunications, as well as the public and academic sectors. In addition, we have an extensive network of channel partners, including software providers, systems integrators, IT outsourcing providers and leading cybersecurity consulting firms.

 

While our focus is on integrated solutions, we market and sell our products as both standalone products and integrated product suites. We derive revenue from the sales of microchips, software subscriptions, maintenance and licenses across our product portfolio.

 

Our core business addresses primarily three large and growing markets – Business Process Automation, Cybersecurity and IoT. According to industry research, worldwide information security spending will exceed $124 billion in 2019 (Aitken 2018)4 and steady commercial and consumer adoption will drive worldwide spending on the Internet of Things to $1.1 Trillion by 2023 (IDC 2019)5 with an estimated 7 billion IoT devices deployed (IoT Analytics 2018)6. Some notable sub-categories of where we have a significant track record include:

 

·Industry 4.0

·IT Operations Automation

·Drone Security

·Healthcare and Medical Devices

·Data Privacy

·Autonomous Safety

 

As at December 31, 2020, we had 81 employees located across 7 countries. We also have 17 independent contractors located in Vietnam and 2 in France. For the fiscal year ended December 31, 2020, we generated revenues of USD 14.8 million with cash reserves (restricted and unrestricted) of USD 21.8 million.

 

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4 Aitken, R, ‘Global Information Security Spending To Exceed $124B in 2019, Privacy Concerns Driving Demand’, Forbes, August 19, 2018.

5 IDC Spending Guides, ‘Steady Commercial and Consumer Adoption Will Drive Worldwide Spending on the Internet of Things to $1.1 Trillion in 2023, According to a New IDC Spending Guide’, Business Wire, June 13, 2019.

6 Lueth, KL,‘State of the IoT 2018: Number of IoT devices now at 7B – Market accelerating’, IoT Analytics, August 8, 2018.

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Security is our DNA and we are committed to continuing to develop and deliver solutions that keep our clients ahead of the unique cybersecurity threats that they face within their markets, enabling them to adapt to an evolving landscape. Trustworthiness is also demonstrated by means of independent audits and accreditations. WISeKey products and services are recognized for their superior quality and maximum-security levels through accreditations such as WebTrust for the PKI solutions and Common Criteria for the semiconductor products, meeting or exceeding the highest standards required by the industry.

 

Industry Background

 

Knowledge Automation is the next evolution of business process automation

 

Business process automation started in the 1990s with the first wave being simple task automation. The running of simple scripts or code to automate a simple task on a server for example and a situation where every single automation is a new application that must be developed. In the beginning of the 21st century, task automation saw some progression with runbooks and Business Process Management (“BPM”) tools in order to manage the scripts inside of an application. This continues to be an on-premise environment and all of the automations are stored within a single application. In the 2010’s, RPAs and solution building began to take hold with the ability to automate on the desktop. This enabled the automation of User Interface (“UI”) activity and more complex tasks, but the automation continued to be script based and on-premise.

 

WISeKey is poised to lead the next wave of the evolution in business process automation using AI to automate data and human knowledge for significantly improved and more efficient decision making of increasingly complex tasks. This is knowledge automation! It enables all tasks to be automated and to fully digitize processes from end-to-end. It is imperative complexity and cybersecurity, which have been the most pressing issues to resolve in the next evolution are addressed.

 

RPA scaling is limited to static tasks and not suited for complex or highly variable tasks. It makes maintenance and staying current extremely costly. Traditionally, business process automations have been applied directly to a UI or server which requires an on-premise presence in order to manage cybersecurity threats. These automations are not supportive of a true digital transformation as the approach is restricted to high frequency/low variability tasks with premise access. While this type of automation can increase the throughput of staff, it requires people to manage and supervise the automation and has a low ceiling.

 

WISeKey Knowledge Automation is breaking through these current limitations represents the next wave after RPA. We are providing a true digital transformation through process automation. Automation powered by Advanced AI acts on contextual data and insight from data – not on scripted instructions to automate a specific task, thereby reducing the effort required to automate. Automation is accomplished via secure APIs and data secured by Trust technologies such as digital identities and PKI certificates, enabling a SaaS model and cloud-based automation, thereby lowering costs to the customer. Applied AI automatically selects knowledge to apply in order to automate. Solutions are not fixed, enabling adapting to business change, thereby lowering maintenance costs (TCO). Reliance on data, not scripted automation, and lower automation and maintenance costs means that all tasks in a process can be automated – delivering end-to-end digital transformation.

 

Broad rollout and adoption of internet connected devices creates increased exposure

 

The Internet of Things (IoT) is the network of physical devices, vehicles, home appliances, and other things embedded with electronics, software, sensors, actuators and network connectivity that create an ecosystem of connected devices exchanging and making decisions on data that is being broadcast across the Internet.

 

Organizations face persistent threats from advanced attackers who are increasingly aware of existing vulnerabilities in existing security solutions and target the weakest link in the chain of security. Attackers can penetrate unsecured devices and subsequently connect to and cause harm to networks, manipulate data or use this data to gain competitive advantages. These devices include employees' personal devices (e.g., smartphones, laptops, and tablets), non-employee personal devices, (e.g., devices owned by third parties and others within enterprises), as well as IoT devices used for corporate purposes (e.g., lights, security cameras, printers, point-of-sale machines, thermostats, and medical devices). This landscape is growing rapidly and securing these devices and the data they provide has become an overwhelming priority for almost every single company in business today.

 

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Most devices today lack encryption, authentication and other forms of protection from malicious attacks. Once the security parameters are penetrated, attackers can infiltrate and further spread malicious software to a range of devices. This can ultimately lead to interruption of business operations, slowdown of internet functionality, potential disruptions to critical infrastructure, and in some cases even the loss of sensitive consumer information. Based on a report that INC.com conducted with collaboration from Cisco and the National Center for Middle Market, 60% of small businesses would fold within 6 months of a cyber-attack (Galvin 2018)7.

 

Existing security solutions were not built for today's connected world

 

Traditional IT security consists of software security solutions that were developed decades ago and focus primarily on legacy closed networks where the security landscape and challenges are less fractured and firewalls are used to protect a well-defined network perimeter.

 

Unlike personal computers, IoT devices rely on cloud computing for much of their operations. This has driven a paradigm shift to device-level security, as smart devices lack the critical security infrastructure to prevent infiltration. Attackers carry out DDoS (Distributed Denial of Service) attacks by taking advantage of vulnerabilities in these devices, which enables them to command a much greater and more widely distributed IP address base than other attacks.

 

In today's environment, security for IoT relies on various vendors and solutions. According to Symantec Corporation, the average enterprise uses 75 distinct and different security products (Symantec 2015)8. These products can be effective at preventing an attack if it falls within the scope of their specific capability and the enterprises have the necessary security knowledge of how to implement the different elements. Enterprises increasingly require a vendor such as WISeKey that can provide a fully integrated offering designed specifically to address the unique challenges of IoT security.

 

Enterprises need security solutions that address today's complexities and dynamic threat environment

 

Enterprises must address the IoT security problem and bridge the gap between device proliferation and device security. It is imperative for devices to be manufactured with immutable digital identities that can be secured inside embedded microchips, giving the devices the ability to securely authenticate themselves within the network. This device-level authentication creates an end-to-end secure connection, extending all of the way from the device through the cloud platforms and ultimately to the end applications, eliminating potential security gaps that are inevitably generated during integration of various technologies.

 

Cyber-attackers often target identities as they provide access to valuable systems and data while concealing their activity within networks. More than ever, enterprises must focus on digital identities as the primary constant in an ever-evolving technology and threat landscape. PKI and digital certificates are two tools in the security chain that leverage the device's digital identity to implement strong authentication, encryption and digital signatures, which are the building blocks of cybersecurity solutions. Digital certificates provide identifying information, are forgery resistant, and can be verified because they are issued by official, trusted agencies. As digital identities have effectively become the new network perimeter, securing these identities has become paramount.

 

Our Technology

 

After reviewing the market conditions listed in the Industry Background section above, it's easy to see that there is a clear and present need for a unified platform that can address the broad range of unique security, trust and automation challenges facing the market today. Even with a host of large corporations operating in automation and cybersecurity, they have not succeeded in building - in the way WISeKey does - comprehensive solutions that integrate automation, software and hardware into a single, easy to implement, platform that gives organizations the peace of mind that their processes are automated and products, networks, private data, and reputations are holistically protected.

 

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7 Galvin, J, ‘60 Percent of Small Businesses Fold Within 6 Months of a Cyber Attack. Here’s How to Protect Yourself’, Inc., May 7, 2018

8 Symantec, ‘Symantec Introduces New Era of Advanced Threat Protection’, Symantec Press Release, October 27, 2015

 

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WISeKey with its Trust Technology is a leader in cybersecurity with core technology used to generate digital identities
and authenticate data and IoT, thereby enabling trust in IoT, data and identification. WISeKey’s recent acquisition of arago brings with it its AI and Data Technology who are leaders in business process automation and their next-generation Knowledge Automation enables up to 3x higher automation at lower ownership cost and enables full digitization of end-to-end processes and establishes customer data platform to support AI and analytics.

 

WISeKey is now combining these technologies, adding Trust to Knowledge Automation and enabling the delivery of the next wave in business process automation with the Trust required to combat the cyberthreats that have plagued the automation market in the past. This is a cloud-based SaaS offering designed for an uncertain cyberthreat environment with the customer data secured and authenticated throughout the entire process delivering unprecedented value to customers.

 

Knowledge Automation – There are three steps in the knowledge automation process:

 

 

1.          Data, a ticket or request is sent to HIRO, the arago knowledge automation platform, and the AI engine assesses if additional data required to determine what to do next.

 

2.          HIRO requests contextual data to determine what the problem is and through a trial-and-error process AI identifies the problem. 

 

3.          HIRO then applies automation to solve problem, where each action feeds back data and the AI engine uses data to determine if the problem is solved or more steps are required.

 

This entire process is secured by Trust technology:

 

All communication through secure APIs, not directly to UI or server

 

Data “watermarked” when leaving customer systems

 

Encrypted in transit to HIRO

 

All contact with data is securely recorded and auditable

 

Personal data (PII) can be pseudomized for GDPR compliance

 

At the heart is an AI Data Warehouse:

 

All data used by HIRO during automation is stored in a Knowledge Graph

 

Data is structured and tagged for analytics – AI ready

 

Connected Trust Essentials - The future of the connected world relies on trust and our mission at WISeKey is to build trust through the delivery of integrated security solutions. This is at the core of our Knowledge Automation platform and supported by three core technologies that we believe are necessary to deliver on this mission: Digital Identities (Digital IDs), Public Key Infrastructure (PKI), and a globally recognized Root of Trust (RoT). Below is a brief overview of each component:

 

Digital IDs - A digital identity is the virtual representation of the real identity of a person, application or object. This identity must be:

 

·Based on standards that are commonly adopted and implemented by default by most common software applications and operating systems, in order to reduce the implementation effort;

 

·Trustworthy by all parties involved in its use or validation, by means of trusting the entity that issued the digital identity;

 

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·Multifunctional, so the same technology can be used for as many purposes as possible, like strong authentication, digital signature and encryption;

 

·Revocable, in case of security compromise, cease of operation or other causes, in such a way that all participants can verify at any moment if an identity is valid.

 

WISeKey leverages the standards around Public Key Cryptography and Digital Certificates to build its concept of Digital ID and electronic transaction security.

 

Public Key Infrastructure (PKI) - A Public Key Infrastructure (PKI) is commonly defined as "a set of IT systems, people, policies, and procedures needed to create, manage, distribute, use, store, and revoke digital certificates". PKI is WISeKey's base technology to manage Digital Identities. WISeKey's PKI is built fully compatible with the ITU X.509 standard (International Telecommunication Union 2016 ITU-T X-Series Recommendations) for personal certificates, and is built around a proprietary software solution for certificate management, that allows issuing millions of certificates and provide a multi-tenant interface that can be accessed by our corporate customers to manage the certificates of their employees or customers.

 

Root of Trust (RoT) - The concept of "Root of Trust" has a dual approach and interpretation:

 

·Software-approach: Transactional RoT - This approach to the RoT is the one related to PKI technology and Digital Certificates. Typically, the PKI is built as a hierarchy of Certification Authorities, in such a way that the CA that issues the Digital Certificate of an entity is itself endorsed by a higher level Certification Authority (CA). Typically, this chain has two or three levels and at the top level we'll find what is called the "Root Certification Authority" (Root CA). This brings a key concept around Trust in PKI: We can trust a Digital Certificate if we trust the Root CA. WISeKey's Root CA is endorsed by the OISTE Foundation.

 

·Device-approach: Hardware RoT - Encryption techniques in general and Public Key Cryptography in particular require an adequate protection of these encryption keys. Keys must be protected against physical and logistical attacks, ensuring that only the authorized owner can use it. The highest protection for these keys can be achieved by incorporating in the device a specific chip that assumes the role to protect the encryption keys and perform the cryptographic operations in a protected environment. These chips, or secure microcontrollers, are commonly known as the "Secure Element". For IoT devices it is also important to ensure that the software running in the device can't be corrupted or modified. This can also be achieved by encrypting and digitally signing the device firmware with a key protected in the secure element.

 

The WISeKey Unique RoT – WISeKey at present is the only company in the world with a value proposition for Root of Trust that covers both the requirements for the Transactional RoT and the Hardware RoT:

 

·WISeKey provides worldwide trusted Digital Certificates thanks to its PKI and the WISeKey/OISTE Root Certification Authorities.

 

·WISeKey provides extremely secure elements that can protect the cryptographic keys in IoT devices.

 

OISTE Root of Trust - Founded in 1998, Transactions Electroniques OISTE was created with the objectives of promoting the use and adoption of international standards to secure electronic transactions, expand the use of digital certification and ensure the interoperability of certification authorities' e-transaction systems. OISTE holds special consultative status with the Economic and Social Council of the UN (ECOSOC) and is an accredited member of the Non-commercial Users Stakeholders Group (NCSG) of ICANN as part of the Not-for-Profit Operational Concerns (NPOC) constituency. The OISTE foundation is regulated by article 80 of the Swiss Civil Code. The OISTE Foundation owns and regulates the OISTE Global Trust Model, which includes as "Root of Trust" a number of Root Certification Authorities that are globally recognized. OISTE delegated to WISeKey SA the operation of the systems and infrastructures supporting the Global Trust Model. The OISTE foundation does not itself issue certificates to end subscribers or operate as data center, instead, it granted WISeKey SA an exclusive license as Subordinate Certification Authority, allowing the delivery of Trust Services for Persons, Applications and Objects.

 

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WISeKey acts as the operator chosen by the foundation for the management of the OISTE Cryptographic Root Key. The OISTE RoT serves as a common trust anchor, recognized by operating systems and IoT applications to ensure the authenticity, confidentiality, and integrity of online identities and transactions. We believe these features are important in creating business opportunities with governments, international bodies, and corporations that are wary of foreign government oversight intervention and centralization of data on servers outside of their respective jurisdictions.

 

Our Additional Products & Services

 

Secure Microchips and Secure Software Products - We offer a large range of secure microcontrollers that share consistent secure 8-/16-/32-bit RISC CPU performance, with strong security mechanisms, and enhanced crypto engines to optimize performance and power consumption. The products also provide high-density, low-power EEPROM and FLASH memory storage technologies. We design our chips to meet the most stringent security requirements, many of them are EAL5+ Common Criteria security-certified, or VISA and MasterCard certified. Common Criteria is a world standard, government driven design for assessing the level of resistance of systems or devices to all known attacks. It is constantly updated with all new attacks, and the chips' resistance is reassessed annually. EAL5+ is currently the highest level of resistance in the secure chip industry. We offer over 50 versions of secure microcontrollers and various supporting secure software solutions:

 

·VaultIC - Family of secure microcontrollers delivered with our own embedded firmware, which we designed to give an unforgeable identity to any connected device, and to provide system integrators with a set of cryptographic APIs (Application Programming Interface) to protect devices against cyber-attacks, counterfeiting and forgery. VaultIC chips are bundled together with our software and services platform to serve the IoT market.

 

·Nanoseal - New family of secure memory chips specifically designed for digital brand protection applications.

 

·MicroXsafe - Secure microcontrollers delivered with an SDK (Software Development Kit) that allows our customers to develop their own embedded firmware (also called OS – Operating System). They are designed to protect smart cards, USB tokens, and electronic systems against cyber-attacks, counterfeiting and forgery.

 

·MicroPass - Family of secure microcontrollers certified by VISA and MasterCard. They have been designed and certified to be integrated into payment cards as well as into wearable devices such as watches, bracelets, and jerseys. They are compatible with NFC (Near Field Communication) standards, thus capable to interact with NFC enabled devices such as Android or iOS smartphones.

 

·PicoPass - Family of secure memory chips specifically designed for NFC (Near Field Communication) access control badges.

 

·VaultiTrust - WISeKey’s VaultiTrust offers two modules: trusted data generation and secure elements provisioning. VaultiTrust takes advantage of WISeKey’s government grade security certified offerings and end-to-end digital security management to generate identity keys and efficiently install them into chips. VaultiTrust’s web portal complements the service by offering an easy way to configure, manage and track production. WISeKey operates FIPS 140-2 Level 3 certified Hardware Security Modules (HSM) to efficiently generate secure data. These HSM are located in a WISeKey Common Criteria EAL5+ and ISO27001 certified backed up data center and the HSM can be shared only upon customer’s request. WISeKey also offers a cryptography customization service whenever needed.

 

·WISeTrustBoot - WISeKey's WISeTrustBoot solution, is the first platform-independent "Secure Boot" and "Secure Firmware Update" solution that combines the strength of a tamper resistant secure elements- VaultIC, state-of-the-art crypto libraries and strong digital signatures. By storing critical boot information in a VaultIC chip, and cryptographically embedding this chip into the device's main processor, the carefully designed boot loader of the main processor becomes a stronghold able to verify the authenticity of the firmware prior to starting up or receive firmware updates. WISeTrustBoot is delivered to our customers with a powerful toolbox providing application developers the flexibility to tailor it to their specific needs.

 

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·CertifyID PKI Suite – WISeKey's PKI Suite is branded with the "CertifyID" trademark. This suite comprises all the products required to: 1) build an enterprise-grade PKI platform that can be used to serve the most vital needs, and 2) leverage the use of the digital certificates due to software applications to implement digital signatures, authentication and encryption. The CertifyID Suite is composed of these Products:

 

oUniversal Registration Authority (URA) - The URA is WISeKey's main application for certificate management and can be used to build a multi-tenant, multi-purpose certificate management Solution

 

oWISignDoc - This product provides a "Document Signature Server" that can be integrated into the corporate business processes to manage legally-binding digital signatures

 

oCertifyID Suite for Microsoft CAS - WISeKey provides series of modules that can enhance the Microsoft Active Directory Certificate Services to build enterprise-grade PKI systems. WISeKey uses the CertifyID Suite to build its own PKI platform and operate it from our Secure Datacenter in Switzerland and other locations to provide "Trust Services" like mPKI (managed PKI).

 

·WISeID - WISeKey's WISeID offers secured storage to protect Personally Identifiable Information (PII). Protecting your PII is important to avoid impersonation and identity theft. The personal data that you save in WISeID always stays under your control, is encrypted with strong keys, and is never communicated to third parties. WISeID users have the freedom to choose where their data resides and who is allowed to access it. By decoupling content from the application and digital identity itself, users are able to use their data as currency and develop digital data dividends-based solutions in the spirit that consumers have a right to know and control how their data is being used and should be able to monetize their data.

 

·WISeAuthentic - WISeKey has been a pioneer in digital luxury product authentication since 2007. WISeKey's expertise in the design of NFC (Near Field Communication) secure chips combined with its WISeAuthentic platform for the identification, authentication, tracking and direct marketing of goods, provides customer-tailored solutions for brand protection. WISeAuthentic provides the link between a physical product and a digital identity to effectively protect them against counterfeiting and create new, unprecedented channels between brands and their distributors and customers. WISeAuthentic is both an enterprise solution as well as mobile applications that provide a variety of services and information specifically designed to a particular a stakeholder group. WISeKey has successfully deployed its WISeAuthentic platform to luxury brands including Bulgari and LVMH's Hublot watches, and believes the WISeAuthentic platform can successfully be deployed for a large variety of sectors. Our most recent developments enhance our security solution through secure Blockchain layers.

 

·WISePrint – The WISeAuthentic portfolio has been expanded to reduce the risk of fraud and help printer manufacturers to protect their legitimate cartridges. This solution called WISePrint includes cryptographic hardware modules and a turnkey high security infrastructure as well as services that help deployment from the manufacturer to the end-user.

 

·Trust Services, Managed PKI - WISeKey operates, under the WISeKey/OISTE Root, a worldwide-recognized PKI platform from its secure datacenter in Switzerland. This platform is based in the Certificate Management Solution CertifyID URA (Universal Registration Authority), and enables WISeKey to provide a full portfolio of "Trust Services", delivering digital certificates to protect persons, applications and objects. One of the advantages of the URA platform is the capability to build a multi-tenant service with delegated administrators. This service allow WISeKey to provide a "Managed PKI" service to our customers, that can access the URA to manage their digital certificates without requiring to deploy any on-premises architecture, as the MPKI service is securely accessed from the cloud using a web portal or advanced API, that enables certificate management automation. MPKI customers have the ability to manage multiple certificate types, as for example:

 

·Personal Digital Certificates for employees or customers, that enable secure email, document signatures and others;

 

·SSL Certificates, to protect the corporate web and application servers;

 

·Device Certificates, to protect IoT applications.

 

Market Verticals

 

Industry 4.0 - Industry 4.0 is based on the concept of smart cities and factories where machines are augmented with internet connectivity and connected to a system that can visualize the entire production chain and make decisions on its own. The trend is towards automation and data exchange in technologies which include Smart Cities, Smart Meters, Cyber-Physical Systems (CPS), the Industrial IoT (IIOT), cloud computing and cognitive computing. Industry 4.0 is also referred to as the fourth industrial revolution. Our solutions are ideally suited to meet the needs of the Industry 4.0 market, where connected devices and cloud platforms merge with the goal of automating processes and introducing predictive analytics that can submit a repair request before a problem occurs, saving valuable down-time that costs manufacturers and suppliers millions in lost production. Industry 4.0 is fast becoming synonymous for the connectivity trend that is happening inside of smart cities, smart electricity grids, smart buildings, and any network that connects industrial applications.

 

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IT Operations Automation – IT operations have long been faced with inefficient decision making and human error causing problems to be resolved not once, but multiple times before the situation is ultimately resolved. While the market has begun the automation process and evolved to RPAs, the ceiling is low and on-premise deployment is required to manage the security aspects. This also creates more costly investments and drives the human maintenance costs up. With WISeKey’s Knowledge Automation, these barriers are broken down and automation can be deployed where human knowledge can be leveraged and decisions can be automatically taken with the platform continuing to learn. The limits of RPAs typically generate no more than 30% automation while WISeKey’s knowledge automation significantly enhances proven automation rates. This drive efficiency, cost savings and a continuously improved customer satisfaction.

 

Drone Security - Enterprise drones as all unmanned aerial vehicles (UAVs) are experiencing massive growth across many segments including agriculture, construction, delivery, and law enforcement. As this growth occurs, the need for security becomes even more prevalent. There are security vulnerabilities through the entire process with risks not only of the drones being illicitly used but also of the data being highjacked. WISeKey has solutions to secure not only the drones themselves, but also the controllers, data, communications and even pilots with digital identities.

 

Healthcare and Medical Devices – COVID-19 has changed the landscape of healthcare and driven a massive increase in virtual health visits and home testing. This has continued to exacerbate the need for data privacy and test and health monitoring security. WISeKey has proven technologies already deployed in the market that provide digital identities for healthcare workers and consumers alike. These digital identities are combined with device security and data encryption to provide holistic security solutions allowing for home health care and testing to not only meet the current regulations but go beyond them and future proof the solutions.

 

Data Privacy - The protection of the information in general, and the protection of the private personal information of people in particular, is based on two major paradigms:

 

·Information can only be accessed by the authorized parties, as decided by the owner at any moment. This includes the capability to authenticate who is trying to access the information, and also to avoid eavesdropping during storage or transmission;

 

·Information must be authentic, so it cannot be manipulated while stored or transmitted, and there must be a mechanism to detect if any tampering occurred.

 

WISeKey uses advanced technologies that ensure the privacy of personal data thanks to the adoption of PKI technology, including:

 

·Digital Identity, in the form of a Digital Certificate, to implement strong authentication mechanism, being able to ensure who can access the information.

 

·Strong encryption to protect the data while stored in servers or transmitted over the internet.

 

·Legally-binding digital signatures to ensure that the authenticity and integrity of the information

 

WISeKey's suite of products and services, including CertifyID and WISeID products enable such capabilities on all environments, including enterprise applications, desktop solutions, and mobile applications.

 

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Autonomous Safety - The growing addition of complex technologies in the automotive industry had always as a goal to elevate the levels of safety and comfort for drivers and passengers. Self-driving cars, intelligent collision detection, advanced entertainment systems, connected to the Internet are just a few to mention. The potential risk of security flaws or errors in these technologies is enormous. Latest reports go as far as to consider a self-driving vehicle as a weapon if a malicious attacker takes controls of it (Campbell 2018)9. The only possibility to adopt these technologies with a reasonable control of the inherent risks is to adopt and embed security as a fundamental principle of the design and manufacturing process. Intelligent cars must embed security technologies in all layers where a potential attack vector exists. All sensors in the cars must interact with the controlling units in a way that both parts can be sure that there is no room for tampering in the data and commands. One must also control who can access the car components, from the driver to the personnel at the service shops. WISeKey offers a suite of technologies to enable such levels of security, including:

 

·VaultiTrust - WISeKey’s VaultiTrust can be used for trusted data generation and secure elements provisioning inside of secure automotive manufacturing applications.

 

·ISTANA PKI solution: Solution to manage all components in an intelligent car, by means of providing strong digital identities, based on PKI technology.

 

Our Competitive Strengths

 

We believe we have several competitive advantages that will enable us to defend and extend our market position in automation, digital identification and IoT security. Our key competitive strengths include:

 

·Cybersecure Knowledge Automation - Business process automation is not a new market, but the WISeKey offer is changing the landscape and revolutionizing the opportunity for process automation with a new and comprehensively secure automation platform. This allows for end-to-end automation provided via the cloud which opens signtifiantly more opportunity. In addition, the fact that all of the data and inputs are secured enables for automation to be accomplished with less data because data uncertainty is removed from the equation. This is transformational and empowers business process automation to be fully digitized.

 

·Unified Cybersecurity Platform - On the surface it may seem easy to look at WISeKey's secure semiconductor offerings and to compare us to other traditional semiconductor companies like NXP, Microchip, or ST Microelectronics or, or considering our experience in Root of Trust and PKI services, compare us to Certificate Authorities (CA) like Digicert, Comodo, or Globalsign. The key to our success is the fact that we are the first company of our scale to combine both offerings into a single platform.

 

The term "one-stop-shop" may seem a bit cliché but in this case it's a perfect description of our capabilities. In the end, your security ecosystem must be solid across the full spectrum. There are three distinct advantages to building a connected security scheme from the products delivered by one vendor: First, one does not have to hire or pay for the security expertise to make sure that each different component will work with the next element; second, time to market is critical in the IoT space and qualifying multiple vendors and negotiating contracts takes up time where a manufacturer's product could be selling instead of waiting to be built; third, if a security issue needs to be addressed only one vendor needs to be engaged to resolve the issues as quickly as possible.

 

·Swiss-based RoT - Swiss neutrality, security and privacy laws allow us to operate as the trusted operator of the OISTE Global RoT and without geo-political or governmental constraints. The OISTE RoT is located in Switzerland and is managed by a not-for-profit entity, OISTE. The OISTE RoT serves as a common trust anchor, recognized by operating systems and IoT applications to ensure the authenticity, confidentiality, and integrity of online identities and transactions. We believe these features are important in creating business opportunities with various governments, international bodies, and industrial companies that are wary of foreign government oversight intervention and centralization of data on servers outside of their respective jurisdictions.

 

·Global Interoperability - We offer solutions on a global scale that are capable of adapting to complex and country-specific rules and regulations. We operate our RoT within the EU and India, and expect to operate RoT in the United States and China. Our RoT satisfies national cybersecurity requirements and is backed by globally recognized security credentials, allowing us to deploy our trusted platforms on a global scale while adapting to country-specific security regulatory bodies.

 

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9 Campbell, P, ‘Hackers have self-driving cars in their headlights’, Financial Times, March 15, 2018.

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Our Growth Strategies

 

Our mission is to build trust through the delivery of integrated automation and security solutions. This is a broad reaching goal that requires a well-thought-out strategy to accomplish it. The key elements of our growth strategy include:

 

·Direct Sales and Expansion within our Existing Customer Base - Our existing customer base provides a significant opportunity to drive incremental sales. We plan to increasingly market our automation, cybersecurity software and ROT offerings to our customers. We currently have growing number of customers using multiple components of our portfolio and believe helping our current customers identify gaps in their strategies will drive significant cross selling opportunities and increase our product deployment. In addition, we are investing in our Sales and Marketing to increase our ability to address new customers and opportunities in a direct sales model.

 

·Acquiring New Customers through an OEM approach - Leveraging the expertise of others is always a smart way to approach the market. What’s more valuable is being able to offer others, OEMs and Systems Integrators to expand their own business models and approach by leveraging our cybersecurity and automation portfolio. This empowers them to customize their approach to the market and support that with a platform they can build upon. Knowledge Automation may be the best example where OEMs and Systems Integrators alike can integrate the Hiro platform to their existing business process automation ecosystem and drive their value to customers up much more rapidly than was previously possible. This in-turn enables WISeKey to address new markets and niche plays that otherwise might not be realized.

 

·Expand our Geographic Coverage - We operate in a large, growing markets and there are substantial opportunities to expand our geographic coverage and client base. We plan to expand our global footprint outside of the areas where we currently operate. Our Swiss affiliation allows us to penetrate markets that have been traditionally difficult for our competitors and other security vendors, including China. In recent years we entered into the Indian market and expanded our operations in France, Taiwan, Japan, the United States and Germany. We specifically want to focus on continued expansion in the United States, which is a very underpenetrated foreign market for the Company.

 

·Selectively Pursue Strategic Transactions - We will continue to proactively explore and pursue selective acquisitions to help drive our growth and complement our product offerings, expand the functionality of our security solutions, acquire technology or talent, or bolster our leadership position by gaining access to new customers or markets. Acquisitions remain core to our strategy and we continue to monitor an active pipeline of opportunities.

 

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C.Organizational Structure

 

We are the holding company of the WISeKey Group.

 

The chart below contains a summary of our organizational structure and sets out our subsidiaries, associated companies and joint ventures as at December 31, 2020. Although not all of our subsidiaries are wholly-owned, all of them are assessed as being under our control.

 

 

As at December 31, 2020, our main operating subsidiaries were WISeKey Semiconductors SAS, domiciled in France, and WISeKey SA, domiciled in Switzerland:

 

Company Name   Country of incorporation   Percentage ownership
as at December 31, 2020
WISeKey SA   Switzerland   95.75%
WISeKey Semiconductors SAS   France   100.00%

 

D.Property, Plants, and Equipment

 

Our corporate headquarters are located in Geneva, Switzerland. The principal office for our Swiss and international operations, which is also our registered office, is located in Zug, Switzerland.

 

As of December 31, 2020, the net book values of tangible fixed assets were as follows:

 

    As at December 31, 2020
Asset category  

Net book value

(USD millions)

Machinery & equipment   0.7
Office equipment and furniture   0.3
Total tangible fixed assets   1.0

 

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We do not own any facility and our group companies have entered into lease arrangements for the premises in which they operate. The following table sets forth our most significant facilities as at December 31, 2020:

 

Location  

Size of site

(in m2)

  Use of the property
Meyreuil, France   1,498*   Research & development, sales & marketing, administration.
Geneva, Switzerland   693*   Head office administration, sales & marketing and data center.

* excluding parking spaces

 

Item 4A.Unresolved Staff Comments

 

Not applicable.

 

Item 5.Operating and Financial Review and Prospects

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report on Form 20-F.

 

Certain information included in this discussion and analysis includes forward-looking statements that are subject to risks and uncertainties, and which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. For further information on important factors that could cause our actual results to differ materially from the results described in the forward-looking statements contained in this discussion and analysis, see "Special Note Regarding Forward-Looking Statements" and "Item 3D. Risk Factors."

 

A.Operating Results

 

Company Overview

 

We are a Swiss cybersecurity company focused on delivering integrated automation and security solutions globally. With over two decades of experience in the digital security market, we integrate our secure semiconductors, cybersecurity software, and a globally recognized Root of Trust (RoT) into leading-edge products and services that protect users, devices, data and transactions in the connected world. Now, this is also a cybersecure wrapper for our knowledge automation platform leveraging artificial intelligence and revolutionizing the business process automation space.

 

WISeKey is now positioned to further the digital transformation that has just started for all markets. By leveraging the strong track record of cybersecurity and now bringing that to business process automation we are set to revolutionize the market while at the same time continue to provide the highest quality solutions serving the semiconductor and digital identity markets.

 

Basis of presentation

 

We prepare our financial statements in accordance with US GAAP. Our reporting currency is the U.S. Dollar ("USD").

 

Our critical accounting policies are described in Note 4.

 

Discontinued Operations relating to WISeKey (Bermuda) Holding Ltd and affiliates (QuoVadis Group)

 

On December 21, 2018 the Group signed a sale and purchase agreement (the "SPA") to sell WISeKey (Bermuda) Holding Ltd, a Bermuda based company, and its affiliates to Digicert Inc. The sale was completed in the first quarter of 2019. The group subsidiaries making up the QuoVadis Group in scope for the sale were WISeKey (Bermuda) Holding Ltd, QuoVadis Trustlink Schweiz AG, WISeKey (UK) Ltd, QuoVadis Trustlink BVBA, QuoVadis Trustlink BV, QV BE BV, QuoVadis Trustlink GmbH, QuoVadis Services Ltd, and QuoVadis Ltd.

 

 42

 

WISeKey Consolidated Financial Statements for the Year Ended December 31, 2018

 

We assessed the SPA under ASC 205 and concluded that, although the sale had not been completed as at December 31, 2018, the operation met the requirement to be classified as held for sale and as such qualifies as a discontinued operation.

 

In line with ASC 205-20-45-3A, we reported the results of the discontinued operations as a separate component of income, and classified their assets and liabilities separately as held for sale in the balance sheet for all periods presented. Long lived assets classified as held for sale were recorded at the lower of (i) their carrying value, and (ii) their fair value less costs to sell. No gain or loss on classification as held for sale was recorded in 2018. The Group elected to allocate interest to discontinued operations in accordance with ASC 205-20-45-6 to 205-20-45-8.

 

WISeKey Consolidated Financial Statements for the Year Ended December 31, 2019

 

The sale of WISeKey (Bermuda) Holding Ltd and its affiliates was completed on January 16, 2019, when all entities except QuoVadis Services Ltd were transferred to Digicert Inc. The transfer of ownership of QuoVadis Services Ltd was conditional on receiving the consent from the Regulatory Authority in Bermuda (the "RAB") (the "RAB Consent") to the change in ultimate beneficial ownership of QuoVadis Services Ltd, being the entity holding the Communications Operating Licence in Bermuda. The RAB Consent was obtained in February 2019 and the transfer of ownership of QuoVadis Services Ltd from WISeKey to Digicert Inc. was effective on February 28, 2019. We assessed the SPA under ASC 810-10-40-6 and concluded that the terms and conditions of the SPA met the definition to account for the sale as a single transaction effective on January 16, 2019.

 

We assessed the SPA under ASC 205 and concluded that, for the period January 01, 2019 to January 16, 2019, the operation met the requirement to be classified as held for sale and as such qualifies as a discontinued operation. The Group elected to allocate interest to discontinued operations in accordance with ASC 205-20-45-6 to 205-20-45-8. The allocation method is detailed in Note 28.

 

In line with ASC 205-20-45-3A, we reported the results of the discontinued operations as a separate component of income. The divested assets and liabilities were deconsolidated from February 28, 2019 for QuoVadis Services Ltd, and from January 16, 2019 for all other entities.

 

The gain from divestiture recorded in the year to December 31, 2019 is shown as a separate line within discontinued operations in the income statement.

 

Factors affecting our results of operations

 

Although most of our IoT segment customers are recurring customers, it is not industry practice to work with long-term contracts. Therefore, most of our IoT customers have signed a framework agreement with us but are not committed to certain volumes over a period of time. This introduces a level of uncertainty on the level of revenue generated from recurring customers.

 

In our IoT segment, as microelectronics technology evolves, customers look for added functionalities, and competitors in the semiconductors industry develop new products, sales of a given product typically decrease over time as the next-generation semiconductors are introduced. In order to sustain revenue, IoT companies must be able to develop or otherwise acquire the rights to develop or market new products with additional or innovative security and application features. See "Item 4. Information on the Company – B. Business Overview" for information regarding our technology and product developments.

 

Operating Segments

 

Since the acquisition of WISeKey Semiconductors SAS in 2016, we organized our business into two operating segments: the IoT segment, which is centered on our family of secure microcontrollers designed to give an unforgeable identity to any connected device, and the mPKI segment, for managed Public Key Infrastructure, which encompasses our digital identity, certificate management and signing solutions, and trust services.

 

 43

 

Geographic Information

 

Our operations are global in scope and we generate revenue from selling our products and services across various regions. While our operations in Europe have historically contributed the largest portion of our revenues, our efforts to expand in the United States have increased the revenue generated from North America. We are also building a strategy to expand into new territories in Asia, although at this stage the results have not yet materialized in our revenue.

 

Our total revenue by geographic region for the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018 is set forth in the following table:

 

    12 months ended December 31,
    2020   2019   2018
Net Sales by region   USD'000 %   USD'000 %   USD'000 %
Switzerland   592 4%   2,137 9%   2,512 7%
Rest of EMEA*   4,321 29%   8,046 36%   14,122 41%
North America   8,260 56%   9,691 43%   15,165 44%
Asia Pacific   1,526 10%   2,504 11%   2,306 7%
Latin America   80 1%   274 1%   175 1%
Total Net sales from continuing operations   14,779 100%   22,652 100%   34,280 100%

 

*EMEA means Europe, Middle East and Africa

 

 44

 

Financial year ended December 31, 2020 compared with financial year ended December 31, 2019

 

  

12 months ended

December 31,

 

12 months ended

December 31,

  Year-on-Year
Variance
USD'000  2020  2019   
          
Net sales   14,779    22,652    -35%
Cost of sales   (8,578)   (12,871)   -33%
Depreciation of production assets   (736)   (325)   126%
Gross profit   5,465    9,456    -42%
                
Other operating income   43    180    -76%
Research & development expenses   (6,012)   (6,422)   -6%
Selling & marketing expenses   (7,355)   (7,929)   -7%
General & administrative expenses   (10,673)   (15,789)   -32%
Total operating expenses   (23,997)   (29,960)   -20%
Operating income / (loss)   (18,532)   (20,504)   -10%
                
Non-operating income   1,127    1,918    -41%
Gain / (loss) on derivative liability   44    214    -79%
Gain / (loss) on debt extinguishment   -    (233)   -100%
Interest and amortization of debt discount   (458)   (742)   -38%
Non-operating expenses   (11,079)   (3,670)   23%
Income / (loss) from continuing operations before income tax expense   (28,898)   (23,017)   -3%
                
Income tax (expense)/recovery   (9)   (13)   -31%
Income/ (loss) from continuing operations, net   (28,907)   (23,030)   -3%
                
Discontinued operations:               
Net sales from discontinued operations   -    1,934    -100%
Cost of sales from discontinued operations   -    (791)   -100%
Total operating and non-operating expenses from discontinued operations   -    (1,801)   -100%
Income tax (expense)/recovery from discontinued operations   -    42    -100%
Gain on disposal of a business, net of tax on disposal   -    31,100    -100%
Income / (loss) on discontinued operations   -    30,484    -100%
                
Net income / (loss)   (28,907)   7,454    -400%
                
Less: Net income / (loss) attributable to noncontrolling interests   (248)   (733)   -66%
Net income / (loss) attributable to WISeKey International Holding AG   (28,659)   8,187    -370%

 

Revenue

 

Our total revenue for the year ended December 31, 2020 decreased by USD 7.9 million or 35% from prior period. The two main macro-economic factors behind this decrease are: the political and trading tensions between the U.S. and China, and the rising threat of protectionism and vulnerabilities in emerging markets, which continue to affect all IoT and microprocessors companies by delaying their investment decisions because of the threat over their supply chain, and the fact that the COVID-19 pandemic has upended the global economy and disrupted worldwide supply chains, causing significant near-term market uncertainty (according to the Semiconductors Industry Association (“SIA”), 2020 State of the U.S. Semiconductor Industry).

 

 45

 

In relation to our mPKI segment, the uncertainty brought on by the COVID-19 pandemic has led some of our customers to halt authentication programs, and not maintain their commitment level to WISeKey.

 

With the planned expansion of WISeKey into AI through arago (see Notes 10 and 40, and above Item 4.A -- History and Development of the Company), we are positioning our product offering for the next technological evolutions to develop our authentication offering and deliver Trusted Knowledge Automation, so as to enable organizations worldwide to digitize their business, in an era when remote working has come to a peak.

 

The table below shows the breakdown of our revenue by operating segment for the years ended December 31, 2020 and December 31, 2019.

 

  12 months ended December 31, 12 months ended December 31, Year-on-Year
USD'000 2020 2019 Variance
IoT segment revenue from external customers 14,317 20,504 -30%
mPKI segment revenue from external customers 462 2,148 -78%
Total revenue 14,779 22,652 -35%

 

Gross Profit

 

Our gross profit decreased by USD 4.0 million to USD 5.5 million (gross margin of 37%) in the year ended December 31, 2020 in comparison with a gross profit of USD 9.5 million (gross margin of 42%) in the year ended December 31, 2019. Most of the decrease in gross profit is the direct result of the decrease in revenue year-on-year. Due to the long manufacturing cycle of our IoT activity, and in order to reduce the lead time to our customers, we start the manufacturing cycle early. However, with the downturn and uncertainties in the global economy, some customers reduced their order volumes in 2020 on a very short notice, which did not allow us to adapt our manufacturing cycle and adversely impacted our gross profit margin. As an illustration, a total obsolescence charge of USD 1.0 million was recorded in the income statement in the year ended December 31, 2020 (compared to USD 335,667 in the year ended December 31, 2019) although the effect was reduced by the utilization of a provision for obsolescence of USD 622,335.

 

To a lesser extent, our gross profit was also adversely impacted by the introduction costs of the new Nanoseal product family in our IoT segment.

 

Other operating income

 

In 2020 our other operating income consisted of recharges for the use of our premises by OISTE (see Note 39 of our consolidated financial statement as at December 31, 2020) for USD 43,000. In 2019 our other operating income consisted of recharges for the use of our premises by OISTE (see Note 39 of our consolidated financial statement as at December 31, 2019) for USD 140,000 and a gain on the liquidation of our subsidiaries WISeKey Italia s.r.l and WISeKey Singapore Pte Ltd. for USD 40,000.

 

We do not have recurring other operating income that contributes to our profit.

 

Research & development expenses

 

Our research and development ("R&D") expenses includes expenses related to the research of new technology, products and applications, as well as their development and proof of concept, and the development of further application for our existing products and technology. They include salaries, bonuses, pension costs, stock-based compensation, depreciation and amortization of capitalized assets, costs of material and equipment that do not meet the criteria for capitalization, as well as any tax credit relating to R&D activities, among others.

 

 46

 

Our R&D expenses represented respectively 25% of total operating expenses in 2020 and 21% in 2019. Our Group being technology-driven, the level of our R&D expenses reflects our engagement to act as a leader on new cybersecurity developments and future applications, despite a reduction of our total operating expenses by USD 6.0 million.

 

Research tax credits are provided by the French government to give incentives for companies to perform technical and scientific research. Our subsidiary WISeCoin R&D Lab is eligible to receive such tax credits. The credit is deductible from the entity's income tax charge for the year or payable in cash the following year, whichever event occurs first.

 

Selling & marketing expenses

 

Our selling & marketing ("S&M") expenses include advertising and sales promotion expenses such as salaries, bonuses, pension costs, stock-based compensation, business development consultancy services, and costs of supporting material and equipment that do not meet the criteria for capitalization, among others.

 

Our S&M expenses accounted for 31% of our total operating expenses in 2020 compared with 26% in 2019. This reflects our efforts to rebuild our sales team following the divestiture of WISeKey (Bermuda) Holding Ltd and its affiliates in 2018. In order to support future revenue, we intend to continue investing in our sales & marketing activities.

 

General & administrative expenses

 

Our general & administrative ("G&A") expenses cover all other charges necessary to run our operations and supporting functions, and include salaries, bonuses, pension costs, stock-based compensation, lease and building costs, insurance, legal, professional, accounting and auditing fees, depreciation and amortization of capitalized assets, and costs of supporting material and equipment that do not meet the criteria for capitalization, among others.

 

Our G&A expenses decreased by 32% or USD 5.1 million in 2020 compared with 2019 and represented 44% of total operating expenses in 2020 compared with 53% in 2019. This decrease is the translation of our efforts to improve our group cost structure. It is also partly due to a reduction of USD 3.2 million in stock-based compensation year-on-year following the grant of ESOP options in 2019 to our employees in recognition for past services to our Company.

 

Operating loss

 

Our operating loss for the year ended December 31, 2020 decreased by USD 2.0 million compared with 2019, which shows that the USD 6.0 million reduction in operating expenses more than compensated for the USD 4.0 million decrease in gross profit. Although we are planning to continue investing in R&D and are also expecting to increase our S&M expenses in future as we strengthen our sales team, the Company keeps its focus on trying to rationalize its cost structure.

 

Non-operating income and expenses

 

The net expense resulting from income and expenses of our non-operating activities increased by USD 7.1 million in 2020 compared with 2019.

 

This is mainly due to an increase of non-operating expenses year-on-year by USD 7.4 million and a decrease of non-operating income year-on-year by USD 0.8 million. The primary factor affecting our non-operating activities in 2020 was the full impairment of our Tarmin warrant which had a carrying value of USD7.0 million (see Note 19 of our consolidated financial statement as at December 31, 2020).

  

 47

 

Conversely, we recorded a decrease in expenses in relation to our financing facilities by USD 0.3 million in 2020 compared with 2019 (derivative liability, debt extinguishment, and interest and amortization of debt discount). In 2020, the Company entered into new financing instruments (see Note 25) without incurring any debt extinguishment expenses (compared to a debt extinguishment expense of USD 0.2 million in 2019). Our interest and amortization of debt discount expense in the year to December 31, 2020 was USD 0.5 million compared with USD 0.7 million in 2019.This decrease was mainly attributable to the fact that most conversions under our convertible facilities occurred long before maturity, which resulted in the corresponding unamortized debt discounts being recorded in Additional Paid-In Capital ("APIC") instead of amortized in the income statement.

 

Our Company regularly enters into loan and convertible loan agreements to finance its operations.

 

Net loss from continuing operations

 

As a result of the above factors, the net loss from continuing operations increased by 26%, or USD 5.9 million, from USD 23.0 million in the year ended December 31, 2019 to USD 28.9 million in the year ended December 31, 2020.

 

Net income

 

In the year ended December 31, 2020, the Company made a net loss of USD 28.9 million.

  

With a non-recurring USD 31.1 million gain from divestiture included in the income on discontinued operations in the income statement in the year ended December 31, 2019, we reached a net income position of USD 7.5 million in 2019.

 

Non-GAAP Performance Measures

 

In addition to our reported financial results prepared under US GAAP, we also prepare and disclose EBITDA and Adjusted EBITDA, which are measures not prepared in accordance with US GAAP. We present EBITDA and Adjusted EBITDA because we believe that these measures are useful to investors as they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We further believe that Adjusted EBITDA is helpful to investors in identifying trends in our business that could otherwise be obscured by certain items unrelated to ongoing operations because they are highly variable, difficult to predict, may substantially impact our results of operations and may limit the ability to evaluate our performance from one period to another on a consistent basis.

 

The usefulness of EBITDA and Adjusted EBITDA to investors has limitations including, but not limited to, (i) they may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) they exclude financial information and events, such as the effects of an acquisition or amortization of intangible assets, or of stock-based compensation, that some may consider important in evaluating our performance, value or prospects for the future, (iii) they exclude items or types of items that may continue to occur from period to period in the future and (iv) they may not exclude all items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations, such as the results of businesses divested during a period. These non-GAAP measures should not be considered in isolation and are not, and should not be viewed as, substitutes for income, net profit for the year or any other measure of performances presented in accordance with US GAAP. We encourage investors to review our historical financial statements in their entirety and caution investors to use US GAAP measures as the primary means of evaluating our performance, value and prospects for the future, and EBITDA and Adjusted EBITDA as supplemental measures.

 

EBITDA and Adjusted EBITDA

 

We define EBITDA as operating income/loss before income tax expenses, depreciation and amortization including any purchase accounting ("PPA") effects when applicable, and net interest expense.

 

We define Adjusted EBITDA as EBITDA further adjusted to exclude non-cash expenses such as stock-based compensation and equity settlements, and other items that management believes are unrelated to our core operations such as non-recurring legal and professional expenses related to our merger and acquisition activities.

 

 48

 

The following table provides a reconciliation from operating loss to EBITDA and Adjusted EBITDA for the years ended December 31, 2020 and December 31, 2019.

 

   12 months ended December 31,
(Million USD)  2020  2019
Operating loss as reported   (18.5)   (20.5)
Non-GAAP adjustments from continuing operations:          
Depreciation expense from continuing operations   1.0    0.8 
Amortization expense on intangibles from continuing operations   0.6    0.5 
EBITDA   (16.9)   (19.2)
Non-GAAP adjustments from continuing operations:          
Stock-based compensation   0.4    5.4 
M&A-related legal fees   0.5    1.0 
M&A-related professional fees   0.1    - 
Listing-related professional fees   0.1    0.2 
Adjusted EBITDA   (15.8)   (12.6)

 

 49

 

Financial year ended December 31, 2019 compared with financial year ended December 31, 2018

 

  

12 months

ended

December 31,

 

12 months

ended

December 31,

  Year-on-Year
Variance
USD'000  2019  2018   
          
Net sales   22,652    34,280    -34%
Cost of sales   (13,196)   (18,319)   -28%
Gross profit   9,456    15,961    -41%
                
Other operating income   180    289    -38%
Research & development expenses   (6,422)   (5,306)   21%
Selling & marketing expenses   (7,929)   (5,772)   37%
General & administrative expenses   (15,789)   (14,232)   11%
Total operating expenses   (29,960)   (25,021)   20%
Operating income / (loss)   (20,504)   (9,060)   126%
                
Non-operating income   1,918    2,181    -12%
Gain / (loss) on derivative liability   214    -    n/a 
Gain / (loss) on debt extinguishment   (233)   -    n/a 
Interest and amortization of debt discount   (742)   (150)   395%
Non-operating expenses   (3,670)   (2,826)   30%
Income / (loss) from continuing operations before income tax expense   (23,017)   (9,855)   134%
                
Income tax (expense)/recovery   (13)   (53)   -75%
Income/ (loss) from continuing operations, net   (23,030)   (9,908)   132%
                
Discontinued operations:               
Net sales from discontinued operations   1,934    19,412    -90%
Cost of sales from discontinued operations   (791)   (6,196)   -87%
Total operating and non-operating expenses from discontinued operations   (1,801)   (19,778)   -91%
Income tax (expense)/recovery from discontinued operations   42    205    -80%
Gain on disposal of a business, net of tax on disposal   31,100    -    n/a 
Income / (loss) on discontinued operations   30,484    (6,357)   580%
                
Net income / (loss)   7,454    (16,265)   146%
                
Less: Net income / (loss) attributable to noncontrolling interests   (733)   13    -5738%
Net income / (loss) attributable to WISeKey International Holding AG   8,187    (16,278)   150%

 

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Revenue

 

Our total revenue for the year ended December 31, 2019 decreased by USD 11.6 million or 34% from prior period. This is mostly attributable to three factors:

 

·The impact of the sale of WISeKey (Bermuda) Holding Ltd and its affiliates on our continuing operations with the absence of cross-selling opportunities, i.e. opportunities to sell other products and services of the group to existing customers of the divested entities, and the reduction of our sales team.

 

·Our IoT activity was adversely affected by the overall downturn in the semiconductor industry worldwide. This downturn, linked to the political and trading tensions between the U.S. and China, and the rising threat of protectionism and vulnerabilities in emerging markets, has affected all IoT and microprocessors companies (according to the Semiconductors Industry Association, 2019 mid-year global semiconductor sales were down 14.5% as compared to 201810).

 

·One of our products, the old-generation of MicroPass used in the past for electronic payments in the U.S. market, is reaching the end of its life.

 

With the introduction of the Nanoseal family, the next-generation family of secure memory chips, we are positioning our product offering for the next technological evolutions. However, the performance of our IoT segment will remain dependent on the macro-economic factors impacting the semiconductors industry, particularly the evolution of the tensions between the United States and China.

 

_____________________________

10 Semiconductors Industry Association, ‘Mid-Year Global Semiconductor Sales Down 14.5 Compared to 2018’, SIA Latest News, August 5, 2019.

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The table below shows the breakdown of our revenue by operating segment for the years ended December 31, 2019 and December 31, 2018.

 

  12 months ended December 31, 12 months ended December 31, Year-on-Year
USD'000 2019 2018 Variance
IoT segment revenue from external customers 20,504 29,404 -30%
mPKI segment revenue from external customers 2,148 4,876 -56%
Total IoT segment revenue 22,652 34,280 -34%

 

Gross Profit

 

Our gross profit decreased by USD 6.5 million to USD 9.4 million (gross margin of 42%) in the year ended December 31, 2019 in comparison with a gross profit of USD 16.0 million (gross margin of 47%) in the year ended December 31, 2018. Due to the long manufacturing cycle of our IoT activity, and in order to reduce the lead time to our customers, we start the manufacturing cycle early. However, with the downturn in the semiconductor industry, some customers were left with excess stock at the end of 2018 thus reduced their order volumes in 2019 on a very short notice, which did not allow us to adapt our manufacturing cycle. The gross margin improved significantly between the first half of 2019 (39%) and the second half of 2019 (45%), however this was not enough to reach a gross margin consistent with 2018 because of the decrease on the higher-margin mPKI revenue between 2018 and 2019.

 

To a lesser extent, our gross profit was also adversely impacted by the new product introduction costs in our IoT segment.

 

Other operating income

 

In 2019 our other operating income consisted of recharges for the use of our premises by OISTE (see Note 39 of our consolidated financial statement as at December 31, 2019) for USD 140,000 and a gain on the liquidation of our subsidiaries WISeKey Italia s.r.l and WISeKey Singapore Pte Ltd. for USD 40,000. In the year ended December 31, 2018 the Group had recorded a USD 289,000 gain on the liquidation of its subsidiary WISeKey BRBV classified as other operating income.

 

We do not have recurring other operating income that contributes to our profit.

 

Research & development expenses

 

Our research and development ("R&D") expenses includes expenses related to the research of new technology, products and applications, as well as their development and proof of concept, and the development of further application for our existing products and technology. They include salaries, bonuses, pension costs, stock-based compensation, depreciation and amortization of capitalized assets, costs of material and equipment that do not meet the criteria for capitalization, as well as any tax credit relating to R&D activities, among others.

 

Our R&D expenses represented respectively 21% of total operating expenses in 2019 and 2018. Our Group being technology-driven, this reflects our engagement to act as a leader on new cybersecurity developments and future applications. In addition to the expected growth in our R&D expenses linked to our technology leadership position, in 2019, the increase by USD 1.1 million or 21% from prior period was partly due to an increase by USD 0.7 million in R&D-related stock-based compensation.

 

Research tax credits are provided by the French government to give incentives for companies to perform technical and scientific research. Our subsidiary WISeKey Semiconductors SAS is eligible to receive such tax credits. The credit is deductible from the entity's income tax charge for the year or payable in cash the following year, whichever event occurs first.

 

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Selling & marketing expenses

 

Our selling & marketing ("S&M") expenses include advertising and sales promotion expenses such as salaries, bonuses, pension costs, stock-based compensation, business development consultancy services, and costs of supporting material and equipment that do not meet the criteria for capitalization, among others.

 

Our S&M expenses increased by 37% or USD 2.2 million in 2019 compared with 2018. This is explained by the expansion of our sales force in Europe and North America and our efforts to rebuild our sales team following the divestiture of WISeKey (Bermuda) Holding Ltd and its affiliates in addition to an increase in our stock-based compensation by USD 0.7 million.

 

General & administrative expenses

 

Our general & administrative ("G&A") expenses covers all other charges necessary to run our operations and supporting functions, and include salaries, bonuses, pension costs, stock-based compensation, lease and building costs, insurance, legal, professional, accounting and auditing fees, depreciation and amortization of capitalized assets, and costs of supporting material and equipment that do not meet the criteria for capitalization, among others.

 

Our G&A expenses increased by 11% or USD 1.6 million in 2019 compared with 2018. This increase is due to an increase in stock-based compensation by USD 2.4 million year-on-year following the grant of ESOP options to our employees in recognition for past services to our Company. If we exclude the impact of our stock-based compensation, our G&A expenses actually decreased by USD 0.8 million, which reflects the efforts that we made to reduce our cost basis.

 

Operating loss

 

Our operating loss for the year ended December 31, 2019 increased by USD 11.4 million compared with 2018, primarily. The key factors behind these results are to the decrease in gross profit by USD 6.5 million as detailed above, and the increase of our stock-based compensation expense by a total of USD 3.8 million year on year, following the grant of ESOP options to our employees in recognition for past services to our Company.

 

Non-operating income and expenses

 

Income and expenditure resulting from non-operating activities increased by USD 1.7 million in 2019 compared with 2018. This was primarily due to our financing facilities. As at December 31, 2018, we had three interest-bearing instruments: the ExWorks Line of Credit, the Crede Convertible Loan Agreement from September 28, 2018, and the Yorkville Convertible Loan Agreement from September 28, 2018. In line with ASC 205, part of the interest expense relating to the ExWorks Line of Credit was classified under the results from discontinued operations, whilst the interest expense in connection with both the Crede Convertible Loan Agreement and the Yorkville Convertible Loan Agreement only related to one quarter. In 2019, the ExWorks Line of Credit was repaid in full on January 16, 2019, but our Company entered into a new loan with ExWorks from April 2019, and the Group paid interest expense for the full year on both the Crede Convertible Loan Agreement and the Yorkville Convertible Loan Agreement, hence an increase in interest expense of USD 0.4 million and in interest and amortization of debt discount by USD 0.6million from prior year. See Note 24 of our consolidated financial statements for the year ended December 31, 2018 and 2019 for details on these financial instruments.

 

Additionally, for the year ended December 31, 2019, our non-operating income decreased by USD 0.3 million from prior period because of a non-recurring credit for the fair value measurement of our investment in OpenLimit booked in the income statement in 2018, and our foreign exchange losses increased by USD 0.4 million from prior period due to unfavorable currency fluctuations (see Impact of foreign currency fluctuation below).

 

Our Company regularly enters into loan and convertible loan agreements to finance its operations.

 

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Net loss from continuing operations

 

As a result of the above factors, the net loss from continuing operations increased by 132%, or USD 13.1 million, from USD 9.9 million in the year ended December 31, 2018 to USD 23.0 million in the year ended December 31, 2019.

 

Income from discontinued operations

 

As detailed in the above Basis of presentation subsection, the SPA to sell WISeKey (Bermuda) Holding Ltd and its affiliates met the requirement to be classified as held for sale and as such qualified as a discontinued operation. In line with ASC 205-20-45-3A, we reported the results of the discontinued operations, WISeKey (Bermuda) Holding Ltd and its affiliates, as a separate component of income.

 

The USD 31.1 million gain from the divestiture of WISeKey (Bermuda) Holding Ltd and its affiliates was also reported in the results of the discontinued operations in the year ended December 31, 2019.

 

Net income

 

With the USD 31.1 million gain from divestiture included in the income on discontinued operations in the income statement in the year ended December 31, 2019, we reached a net income position of USD 7.5 million, compared with a net loss of USD 16.3 million in the year ended December 31, 2018.

 

Non-GAAP Performance Measures

 

In addition to our reported financial results prepared under US GAAP, we also prepare and disclose EBITDA and Adjusted EBITDA, which are measures not prepared in accordance with US GAAP. We present EBITDA and Adjusted EBITDA because we believe that these measures are useful to investors as they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We further believe that Adjusted EBITDA is helpful to investors in identifying trends in our business that could otherwise be obscured by certain items unrelated to ongoing operations because they are highly variable, difficult to predict, may substantially impact our results of operations and may limit the ability to evaluate our performance from one period to another on a consistent basis.

 

The usefulness of EBITDA and Adjusted EBITDA to investors has limitations including, but not limited to, (i) they may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) they exclude financial information and events, such as the effects of an acquisition or amortization of intangible assets, or of stock-based compensation, that some may consider important in evaluating our performance, value or prospects for the future, (iii) they exclude items or types of items that may continue to occur from period to period in the future and (iv) they may not exclude all items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations, such as the results of businesses divested during a period. These non-GAAP measures should not be considered in isolation and are not, and should not be viewed as, substitutes for income, net profit for the year or any other measure of performances presented in accordance with US GAAP. We encourage investors to review our historical financial statements in their entirety and caution investors to use US GAAP measures as the primary means of evaluating our performance, value and prospects for the future, and EBITDA and Adjusted EBITDA as supplemental measures.

 

EBITDA and Adjusted EBITDA

 

We define EBITDA as net profit before income tax expenses, depreciation and amortization including purchase accounting ("PPA") effects, and net interest expense.

 

We define Adjusted EBITDA as EBITDA further adjusted to exclude non-cash expenses such as stock-based compensation and equity settlements, and other items that management believes are unrelated to our core operations such as non-recurring legal and professional expenses related to our merger and acquisition activities.

 

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The following table provides a reconciliation from operating loss to EBITDA and Adjusted EBITDA for the years ended December 31, 2019 and December 31, 2018.

 

   12 months ended December 31,
(Million USD)  2019  2018
Operating loss as reported   (20.5)   (9.1)
Non-GAAP adjustments from continuing operations:          
Depreciation expense from continuing operations   0.8    0.9 
Amortization expense on intangibles from continuing operations   0.5    0.5 
EBITDA   (19.2)   (7.7)
Non-GAAP adjustments from continuing operations:          
Stock-based compensation   5.4    1.7 
Expenses settled in equity   -    1.7 
M&A-related legal fees   1.0    1.3 
M&A-related professional fees   -    0.3 
NASDAQ listing-related professional fees   0.2    - 
Adjusted EBITDA   (12.6)   (2.7)

 

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Factors affecting our income tax expenses and recovery

 

For the financial years 2020, 2019 and 2018, income tax at the Swiss statutory rate compared to the Group's income tax expenses as reported is as per table below.

 

Income taxes at the Swiss statutory rate As at December 31,   As at December 31,   As at December 31,
USD'000 2020   2019   2018
Net income/(loss) from continuing operations before income tax (28,898)   (23,017)   (9,855)
Statutory tax rate 14%   24%   24%
Expected income tax (expense)/recovery 4,043   5,524   2,365
Income tax (expense)/recovery (9)   (13)   (53)
Change in valuation allowance (631) (2,129)   4,228
Permanent Difference (1)   0   (9)
Change in expiration of tax loss carryforwards (3,411)   (3,395)   (6,584)
Income tax (expense) / recovery (9)   (13)   (53)

 

As at December 31, 2020 and 2019, our net deferred tax balance was reconciled as follows:

 

Deferred tax assets and liabilities As at December 31,   As at December 31,  
USD'000 2020   2019  
Stock-based compensation 1                            -  
Defined benefit accrual 1,089   1,100  
Tax loss carry-forwards 12,655   11,264  
Deferred tax liability on change in unrealized gains related to available-for-sale debt securities (753)   -  
Valuation allowance (12,989)   (12,358)  
Deferred tax assets / (liabilities) 3   6  

 

The valuation allowance corresponds to the amount of deferred tax that, based on our accounting assessment under applicable standards, should not be recognized as assets in our balance sheet. For the calculation of the valuation allowance, management has considered the extent to which realization of the tax assets is probable for group entities that are or have been in a loss-making position during the last three financial years.

 

In 2020, the valuation allowance increased by USD 0.6 million due to the increase in tax loss carry-forwards. In 2019, the valuation allowance increased by USD 2.2 million, mainly due to the increase in tax loss carry-forwards by USD 0.7 million and the impact of the divestiture of QuoVadis.

 

Impact of foreign currency fluctuation

 

We operate worldwide and as such are exposed to currency fluctuation risks. Although the majority of our sales, purchase and financial operations are denominated in our reporting currency, the U.S. Dollar, some sales and financing contracts are denominated in other currency, and especially in the currency of our head office in Switzerland, the Swiss Franc.

 

Fluctuations in the exchange rates between the U.S. Dollar and other currencies may have a significant effect on both the Company's results of operations, including reported sales and earnings, and the Company's assets, liabilities and cash flows. This, in turn, may affect the comparability of period-to-period results of operations.

 

We do not currently hedge against foreign currency fluctuation.

 

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      12 months ended December 31,      
      2020   2019   Year-on-Year Variance
Foreign currency to U.S. Dollar   Closing rate 12-month Average rate   Closing rate 12-month Average rate   Closing rate 12-month Average rate
Swiss Franc CHF:USD   1.130846 1.066001   1.033253 1.006467   9.45% 5.92%
Euro EUR:USD   1.222811 1.141357   1.122701 1.119921   8.92% 1.91%
Indian Rupee INR:USD   0.013697 0.013487   0.014027 0.014200   -2.35% -5.02%
Japanese Yen JPY:USD   0.009690 0.009367   0.009201 0.009174   5.31% 2.10%
U.K. Pound Sterling GBP:USD   1.366312 1.283296   1.326752 1.276954   2.98% 0.50%
Taiwanese Dollar TWD:USD   0.035602 0.033968   0.033396 0.032374   6.61% 4.92%

 

The table below shows the variation in foreign exchange rates used to prepare our financial statements for the financial years ended December 31, 2020, December 31, 2019, and December 31, 2018.

 

      12 months ended December 31,      
      2019   2018   Year-on-Year Variance
Foreign currency to U.S. Dollar   Closing rate 12-month Average rate   Closing rate 12-month Average rate   Closing rate 12-month Average rate
Swiss Franc CHF:USD   1.033253 1.006467   1.016946 1.022876   1.60% -1.60%
Euro EUR:USD   1.122701 1.119921   1.145548 1.181497   -1.99% -5.21%
Indian Rupee INR:USD   0.014027 0.014200   0.014367 0.014654   -2.37% -3.10%
Japanese Yen JPY:USD   0.009201 0.009174   0.009115 0.009061   0.94% 1.25%
Singapore Dollar SGD:USD   0.743657 0.732963   0.734040 0.741450   1.31% -1.14%
U.K. Pound Sterling GBP:USD   1.326752 1.276954   1.276021 1.335429   3.98% -4.38%
Taiwanese Dollar TWD:USD   0.033396 0.032374   0.032663 0.033194   2.24% -2.47%

 

We do not operate in countries experiencing hyperinflation and assessed the impact of inflation as immaterial to our financial statements.

 

B.Liquidity and Capital Resources

 

Company liquidity

 

Our cash and capital requirement relate mainly to our operating cash requirement, capital expenditures, contractual obligations, repayment of indebtedness and payment of interest and financing fees.

 

Sources of liquidity

 

Our usual sources of liquidity are cash generated from customers, cash from financing instruments such as debt and convertible debt, cash from share subscription facilities, and cash from private investors in exchange for our Class B Shares. As a non-recurring source of liquidity, the sale of the QuoVadis Group in the first quarter of 2019 provided a material cash inflow. Historically, the Group has been dependent on equity financing to augment the operating cash flow to cover its cash requirements.

 

We had positive working capital of USD 13.7 million as at December 31, 2020. We calculate working capital as our current assets, less our current liabilities. Although our adjusted working capital is positive, based on the Group’s cash projections for the next 12 months to March 31, 2022, the Group will need approximately USD 1 million to fund operations and financial commitments. Note 25 of our consolidated financial statement as at December 31, 2020 describes the sources of funding that the Group can turn to whenever needed. In addition to two separate equity facilities (the SSF and SEDA), the loans contracted by WISeKey in 2020 and 2019 demonstrate the availability of lenders to support the Group in its activities and development.

 

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As at December 31, 2020, we hold cash and cash equivalent and restricted cash in an amount of USD 21.8 million following the cash injection from our financial instruments. We expect to use this liquidity to fund our operations, develop our sales team, and form part of the consideration for future potential merger and acquisition transactions.

 

Consolidated cash flows

 

The following table shows information about our cash flows during the financial years ended December 31, 2020, 2019 and 2018 respectively.

 

    12 months ended December 31,   12 months ended December 31,   12 months ended December 31,
USD'000 2020   2019   2018
             
Cash Flows from operating activities:          
Net cash provided by (used in) operating activities (12,550)   (13,891)   (8,492)
Net cash provided by (used in) investing activities (3,897)   36,626    (4,244)
Net cash provided by (used in) financing activities 21,482   (17,284)   11,876
             
Effect of exchange rate changes on cash and cash equivalents 82   41   (200)
             
Cash and cash equivalents          
  Net increase (decrease) during the period 5,117   5,492   (1,060)
  Balance, beginning of period 16,646   11,154   12,214
  Balance, end of period 21,763   16,646   11,154
             
Reconciliation to balance sheet          
  Cash and cash equivalents from continuing operations 19,650   12,121   9,146
  Restricted cash, current from continuing operations 2,113   2,525   618
  Restricted cash, noncurrent from continuing operations -   2,000   -
  Cash and cash equivalents from discontinued operations -   -   1,390
  Balance, end of period 21,763   16,646   11,154

 

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The following tables provide the details of the cash flows separated between continuing and discontinued activities following the divestiture of QuoVadis.

 

Continuing operations 12 months ended December 31,   12 months ended December 31,   12 months ended December 31,
USD'000 2020   2019   2018
Net cash provided by (used in) operating activities (12,550)   (14,674)   (2,328)
Net cash provided by (used in) investing activities (3,897)   36,626   (5,489)
Net cash provided by (used in) financing activities 21,482   (17,284)   8,198

 

Discontinued operations 12 months ended December 31,   12 months ended December 31,   12 months ended December 31,
USD'000 2020   2019   2018
Net cash provided by (used in) operating activities -   783   (6,164)
Net cash provided by (used in) investing activities -   -   1,245
Net cash provided by (used in) financing activities -   -   3,678

 

We have not experienced any legal or economic restrictions on the ability of subsidiaries to transfer funds to the Company in the form of loans.

 

Impact of discontinued operations

 

The Company has assessed the impact on our cash flows following the sale of the QuoVadis Group. As shown in the table above, the QuoVadis Group was cash flow negative on operating activities, largely as a result of ongoing losses. The sale of the QuoVadis Group has enabled the Company to repay the ExWorks Line of Credit in full during 2019, a facility that carried interest at 12% per annum. In addition to this, the sale of the QuoVadis Group has left the Company with an improved net cash and cash equivalents balance that will enable us to fund our activities as set out above.

 

We believe that the sale of the QuoVadis Group has benefitted the Company significantly as it has provided us with sufficient working capital to be able to focus on the future whilst, at the same time, removing a part of the business that was a drain on our liquidity.

 

Level of borrowing

 

As at December 31, 2020, we held short-term notes payable in an amount of USD 4,114,721, and long–term notes payable in an amount of USD 646,278. The section below gives the detail of the financial instruments used by the company.

 

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Financial instruments

 

The following financial instruments are those that were in use and disclosed in our balance sheet and notes as at December 31, 2020.

 

Share Subscription Facility with GEM LLC

 

On January 19, 2016 the Group closed the SSF with GEM, which is a CHF 60 million facility over 5 years and allows the Group to draw down funds at its option in exchange for WIHN class B shares. The mechanics of the deal allow for a drawdown essentially 18 times in a year, the amount being in a range related to the trading volume and price of the WIHN class B share trading on the Swiss SIX Stock Exchange. The drawdown amount is based on 90% of the average closing price of the last 15 trading days multiplied by 1,000% of the average volume of the last 15 trading days. GEM can then elect to purchase between 50% and 200% of this figure.

 

The instrument was assessed under ASC 815 as an equity instrument. The drawdowns were reflected as increases in Common Share Capital with an increase in the value of common stock issued and the difference between the nominal value of the shares and the funds received being recorded against APIC.

 

In 2017, WISeKey made three drawdowns for a total of CHF 3,905,355 in exchange for a total of 825,000 WIHN class B shares issued out of authorized share capital.

 

There were no drawdowns made in 2018, 2019, or in 2020.

 

Therefore, as at December 31, 2020 the outstanding facility available is CHF 56,094,645.

 

Standby Equity Distribution Agreement with YA II PN, Ltd.

 

On February 08, 2018 WISeKey entered into the SEDA with Yorkville. Under the terms of the SEDA as amended, Yorkville has committed to provide WISeKey, upon a drawdown request by WISeKey, up to CHF 50,000,000 in equity financing originally over a period of three-year period ending March 01, 2021, now over a period of five years ending March 31, 2023 in line with the amendment signed by the parties on March 04, 2020. Provided that a sufficient number of class B shares is provided through share lending, WISeKey has the right to make drawdowns under the SEDA, at its discretion, by requesting Yorkville to subscribe for (if the class B shares are issued out of authorized share capital) or purchase (if the class B shares are delivered out of treasury) class B shares worth up to CHF 5,000,000 by drawdown, subject to certain exceptions and limitations (including the exception that a drawdown request by WISeKey shall in no event cause the aggregate number of class B shares held by Yorkville to meet or exceed 4.99% of the total number of shares registered with the commercial register of the Canton of Zug). The purchase price will be 93% of the relevant market price at the time of the drawdown, determined by reference to a ten-day trading period following the draw down request by WISeKey.

 

The instrument was assessed under ASC 815 as an equity instrument. WISeKey paid a one-time commitment fee of CHF 500,000 (USD 524,231 at historical rate) on April 24, 2018 in 100,000 WIHN class B shares. In line with ASU 2015-15 the commitment fee was capitalized as deferred charges to be amortized over the original duration of the contract as a reduction of equity.

 

In 2018, WISeKey made 4 drawdowns for a total of CHF 1,749,992 (USD 1,755,378 at historical rate) in exchange for a total of 540,539 WIHN class B shares issued out of authorized share capital or treasury share capital.

 

In 2020, WISeKey made the following drawdowns:

 

-On April 16, 2020 one drawdown for CHF 250,000 (USD 259,250 at historical rate) in exchange for 306,372 WIHN class B shares issued out of treasury share capital.

-On May 15, 2020 one drawdown for CHF 249,433 (USD 256,417 at historical rate) in exchange for 343,572 WIHN class B shares issued out of treasury share capital.

 

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-On July 14, 2020 one drawdown for CHF 72,313 (USD 76,652 at historical rate) in exchange for 74,396 WIHN class B shares issued out of treasury share capital.

-On July 16, 2020 one drawdown for CHF 62,500 (USD 66,250 at historical rate) in exchange for 61,035 WIHN class B shares issued out of treasury share capital.

-On August 5, 2020 one drawdown for CHF 250,000 (USD 275,000 at historical rate) in exchange for 198,255 WIHN class B shares issued out of treasury share capital.

-On September 9, 2020 one drawdown for CHF 250,000 (USD 275,000 at historical rate) in exchange for 182,215 WIHN class B shares issued out of treasury share capital.

 

The amortization charge for the capitalized fee recognized in APIC amounted to USD 184,134 for the year to December 31, 2020 and the remaining deferred charge balance was USD 30,188 which was all current.

 

As at December 31, 2020 the outstanding equity financing available was CHF 46,007,830.

 

Facility Agreement with YA II PN, Ltd.

 

On September 28, 2018 WISeKey entered into short-term Facility Agreement (the “Yorkville Loan”) with Yorkville to borrow USD 3,500,000 repayable by May 01, 2019 in monthly cash instalments starting in November 2018. The loan bears an interest rate of 4% per annum payable monthly in arrears. A fee of USD 140,000 and debt issuance costs of USD 20,000 paid at inception.

 

The debt instrument was assessed as a term debt. A discount of USD 160,000 was recorded at inception and will be amortized using the effective interest method over the life of the debt.

 

The remaining loan balance at December 31, 2018 was USD 2,717,773 including unamortized debt discount of USD 57,007.

 

The discount amortization expense recorded for the period to December 31, 2018 was USD 102,993.

 

In the period to December 31, 2018, WISeKey repaid USD 725,220 of the principal loan amount in cash.

 

On June 27, 2019, WISeKey entered into a Convertible Loan Agreement (the “Yorkville Convertible Loan”) with Yorkville to borrow USD 3,500,000 repayable by August 01, 2020 in monthly instalments starting in August 01, 2019 either in cash or in WIHN class B Shares. The loan bears an interest rate of 6% per annum payable monthly in arrears. Total fees of USD 160,000 were paid at inception.

 

The conversion option into WIHN Class B shares is exercisable at the election of Yorkville and may be exercised at each monthly repayment date, covering any amount outstanding, be it principal and/or accrued interests. The initial exercise price is set at CHF 3.00 per WIHN class B Share but may be adjusted as a result of specific events so as to prevent any dissolution effect. The events triggering anti-dissolution adjustments are: (a) increase of capital by means of capitalization of reserves, profits or premiums by distribution of WIHN Shares, or division or consolidation of WIHN Shares, (b) issue of WIHN shares or other securities by way of conferring subscription or purchase rights, (c) spin-offs and capital distributions other than dividends, and (d) dividends.

 

At the date of inception of the Yorkville Convertible Loan, on June 27, 2019, an unpaid balance of USD 500,000 remained on the Yorkville Loan. There was no unamortized debt discount on the Yorkville Loan as it was amortized in accordance with the planned repayment schedule, i.e. by May 01, 2019.

 

In line with ASC 470-50, we compared the present value of the new debt (the Yorkville Convertible Loan) to the present value of the old debt (the Yorkville Loan) using the net method and concluded that the difference was below the 10% threshold. Therefore the Yorkville Convertible Loan was analyzed as a debt modification and accounted for under ASC 470-50-40-14.

 

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In line with ASU 2014-16, the convertible note was assessed as a hybrid instrument, being a debt instrument with an equity-linked component (the conversion option). Per ASC 815-10, the embedded conversion option met the definition of a derivative and was accounted for separately, thereby creating a debt discount.

 

The derivative liability component (the conversion option) was fair valued using a binomial lattice model, building in quoted market prices of WIHN class B shares, and inputs such as time value of money, volatility, and risk-free interest rates. It was valued at inception at USD 257,435, and was allocated between current and noncurrent on a prorata temporis basis according to the monthly repayment schedule. The derivative component will be revalued at fair value at each reporting date in line with ASC 815-15-30-1.

 

On the date of the agreement, WISeKey signed an option agreement granting Yorkville the option to acquire up to 500,000 WIHN class B shares at an exercise price of CHF 3.00, exercisable between June 27, 2019 and June 27, 2022. In order to prevent any dissolution effect, the exercise price may be adjusted as a result of the same specific events listed above as adjustments to the conversion price of the principal amount. In line with ASC 470-20-25-2, the proceeds from the convertible debt with a detachable warrant was allocated to the two elements based on the relative fair values of the debt instrument net of the warrant and the embedded conversion separated out on the one side, and the warrant at time of issuance on the other side. The option agreement was assessed as an equity instrument and was fair valued at grant for an amount of USD 373,574 using the Black-Scholes model and the market price of WIHN class B shares on the date of grant, June 27, 2019, of CH 2.35. The fair value of the debt was calculated using the discounted cash flow method as USD 3,635,638. Applying the relative fair value method per ASC 470-20-25-2, the recognition of the option agreement created a debt discount on the debt host in the amount of USD 326,126, and the credit entry was booked in APIC.

 

As a result of the above accounting entries, the total debt discount recorded at inception was USD 743,561, made up of USD 160,000 fees to Yorkville, USD 257,435 from the bifurcation of the embedded conversion option into derivative liabilities, and USD 326,126 from the recognition of the warrant agreement.

 

On March 04, 2020, WISeKey entered into the Second Yorkville Convertible Loan with Yorkville to borrow USD 4,000,000 repayable by April 30, 2021 in monthly instalments starting on March 31, 2020 either in cash or in WIHN class B Shares. The loan bears an interest rate of 6% per annum payable monthly in arrears. Total fees of USD 68,000 will be paid in monthly instalments over the life of the loan.

 

The conversion option into newly issued or existing WIHN Class B shares is exercisable at the election of Yorkville and may be exercised at any time until all amounts have been repaid in full, covering any amount outstanding, be it principal and/or accrued interests. The initial exercise price is set at CHF 3.00 per WIHN class B Share but may be adjusted as a result of specific events so as to prevent any dilution effect. The events triggering anti-dilution adjustments are: (a) increase of capital by means of capitalization of reserves, profits or premiums by distribution of WIHN Shares, or division or consolidation of WIHN Shares, (b) issue of WIHN shares or other securities by way of conferring subscription or purchase rights, (c) spin-offs and capital distributions other than dividends, and (d) dividends.

 

At the date of inception of the Second Yorkville Convertible Loan on March 04, 2020, an unpaid balance of USD 2,300,000 and an unamortized debt discount of USD 104,469 remained on the Yorkville Convertible Loan.

 

Per ASC 470-50, we compared the present value of the new debt (the Second Yorkville Convertible Loan) to the present value of the old debt (the Yorkville Convertible Loan) using the net method and concluded that the difference was below the 10% threshold. Therefore, the Second Yorkville Convertible Loan was analyzed as a debt modification and accounted for under ASC 470-50-40-14.

 

In line with ASU 2014-16, the convertible note was assessed as a hybrid instrument, being a debt instrument with an equity-linked component (the conversion option). Per ASC 815-10, the embedded conversion option met the definition of a derivative and was accounted for separately, thereby creating a debt discount.

 

The derivative liability component (the conversion option) was fair valued using a binomial lattice model, building in quoted market prices of WIHN class B shares, and inputs such as time value of money, volatility, and risk-free interest rates. It was valued at inception at USD nil. The derivative component will be revalued at fair value at each reporting date in line with ASC 815-15-30-1 and will be allocated between current and noncurrent on a prorata temporis basis according to the monthly repayment schedule (see Note 6).

 

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In 2020, WISeKey’s repayments amounted to a total of USD 2,307,021. As at December 31, 2020, the principal amount outstanding was USD 1,692,979 with an unamortized debt discount of USD 82,560, and the derivative component measured at fair value at the reporting date at USD nil. No conversion rights were exercised in 2020.

 

For the year ended December 31, 2020, WISeKey recorded in the income statement a net loss on derivative of USD 43,655 and a debt discount amortization expense of USD 280,736.

 

Convertible Loan with Crede CG III, Ltd

 

On September 28, 2018 the Group closed a convertible loan with Crede for an amount of USD 3,000,000. The funds were made available on October 31, 2018. The loan bears a 10% p.a. interest rate, payable in arrears on a quarterly basis starting December 31, 2018, and is repayable in WIHN class B shares any time between November 30, 2018 and the maturity date of September 28, 2020, at Crede’s election. Accrued interests are payable, at WISeKey’s sole election, either in cash or in WIHN class B Shares. The conversion price applicable to the prepayment of the principal amount or accrued interest is calculated as 93% of the average of the 2 lowest daily volume-weighted average prices quoted on the SIX Stock Exchange during the 10 Trading Days immediately preceding the relevant conversion date or interest payment date respectively, disregarding any day on which Crede (or its Affiliates or related party) has effected any trade, converted into USD at the exchange rate reported by Bloomberg at 9 a.m. Swiss time on the relevant conversion date or interest payment date.

 

Due to Crede’s option to convert the loan in part or in full at any time before maturity, the convertible loan was assessed as a share-settled debt instrument with an embedded put option. Because the value that Crede will receive at settlement does not vary with the value of the shares, the settlement provision is not considered a conversion option. We assessed the put option under ASC 815 and concluded that it is clearly and closely related to its debt host and therefore did not require bifurcation. Per ASC 480-10-25, the convertible loan was accounted for as a liability measured at fair value using the discounted cash flow method at inception.

 

On the date of the agreement, WISeKey signed an option agreement granting Crede the option to acquire up to 408,247 WIHN class B shares at an exercise price of CHF 3.84, exercisable between October 31, 2018 and October 29, 2021. Per the option agreement’s term, the date of grant under US GAAP is October 29, 2018 upon issuance of a Tax Ruling from the Swiss Federal Tax Administration and the Zug tax authority. In line with ASC 470-20-25-2, the proceeds from the convertible debt with a detachable warrant was allocated to the two elements based on the relative fair values of the debt instrument without the warrant and of the warrant at time of issuance. The option agreement was assessed as an equity instrument and was fair valued at grant for an amount of USD 408,056 using the Black-Scholes model and the market price of WIHN class B shares on the date of grant, October 29, 2018, of CH 3.06. The fair value of the debt was calculated using the discounted cash flow method as USD 2,920,556. Applying the relative fair value method per ASC 470-20-25-2, the recognition of the option agreement created a debt discount on the debt host in the amount of USD 367,771, and the credit entry was booked in APIC.

 

In 2020, Crede issued three exercise notices, resulting in the following conversions:

 

-On January 10, 2020 for 150,000 WIHN class B shares delivered on January 14, 2020 for a conversion of USD 259,436.

-On April 03, 2020 for 200,428 WIHN class B shares delivered on April 06, 2020 for a conversion of USD 152,490.

-On June 15, 2020 for 970,555 WIHN class B shares delivered on June 18, 2020 for a final conversion of USD 816,974.

 

The loan was fully converted after the last conversion on June 18, 2020. Therefore, there were no outstanding balance on this loan as at December 31, 2020.

 

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For the year to December 30, 2020, the Group recorded a net debt discount amortization expense in the income statement of USD 29,055.

 

Credit Agreement with ExWorks Capital Fund I, L.P

 

On April 04, 2019 WISeCoin, an affiliate of the Company, signed a credit agreement with ExWorks. Under this credit agreement, WISeCoin was granted a USD 4,000,000 term loan and may add up to USD 80,000 accrued interest to the loan principal, hence a maximum loan amount of USD 4,080,000. The loan bears an interest rate of 10% p.a. payable monthly in arrears. The maturity date of the arrangement is April 04, 2020 therefore all outstanding balances are classified as current liabilities in the balance sheet. ExWorks can elect to have part of or all of the principal loan amount and interests paid either in cash or in WCN Token as may be issued by WISeCoin from time to time. As at June 30, 2019, the conversion price is set at CHF 12.42 per WCN Token based on a non-legally binding term sheet.

 

Under the terms of the credit agreement, WISeCoin is required to not enter into agreements that would result in liens on property, assets or controlled subsidiaries, in indebtedness other than the exceptions listed in the credit agreement, in mergers, consolidations, organizational changes except with an affiliate, contingent and third party liabilities, any substantial change in the nature of its business, restricted payments, insider transactions, certain debt payments, certain agreements, negative pledge, asset transfer other than sale of assets in the ordinary course of business, or holding or acquiring shares and/or quotas in another person other than WISeCoin R&D. Furthermore, WISeCoin is required to maintain its existence, pay all taxes and other liabilities.

 

Borrowings under the line of credit are secured by first ranking security interests on all material assets and personal property of WISeCoin, and a pledge over the shares in WISeCoin representing 90% of the capital held by the Company. Under certain circumstances, additional security may be granted over the intellectual property rights of WISeCoin and WISeCoin R&D, and the shares held by WISeCoin in WISeCoin R&D.

 

Total debt issue costs of USD 160,000 were recorded as debt discount and amortized over the duration of the loan.

 

In the year 2020, WISeKey recorded a total debt amortization charge of USD 8,657 and the debt discount was fully amortized as at December 31, 2020.

 

As at December 31, 2020, the loan had not been repaid and the outstanding borrowings were USD 4,030,000, meaning that the loan is past due under the terms of the credit agreement with ExWorks. The Company is currently in negotiation with ExWorks regarding a potential sale of its investment in Tarmin, a company in which ExWorks is also a significant shareholder. It is the view of the management of the Company that the sale of the investment in Tarmin and the repayment of the credit agreement are codependent and therefore the loan will be repaid at such time as the investment is sold. ExWorks continues to charge interest on the loan at the rate of 10% p.a. and has not launched any formal recovery proceedings as of the date of this report.

 

Credit Agreement with Long State Investment Limited

 

On December 16, 2019, WISeKey entered into the LSI Convertible Facility with LSI to borrow up to CHF 30 million. Under the terms of the LSI Convertible Facility, WISeKey will be able to drawdown individual term loans of up to CHF 500,000 or, if so agreed between the parties, up to CHF 2.5 million at an interest rate of 1.5% p.a., up to an aggregate amount of CHF 30 million over a commitment period of 24 months. LSI will have the right to convert a drawdown tranche into WIHN class B shares or, if so agreed among the parties and permitted by law, into ADSs representing WIHN class B shares, within a period of 21 SIX trading days after each individual drawdown at 95% of the higher of (i) the then prevailing market rate and (ii) the minimum conversion price of CHF 1.80. Any term loan not converted by LSI initially will automatically convert into WIHN class B shares, or ADSs, 20 SIX trading days before the expiration of the commitment period at the applicable conversion price. Under certain circumstances, interest payments may be “paid in kind” by capitalizing such interest and adding to it the aggregate principal balance of the loan outstanding.

 

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Under the arrangement, WISeKey and LSI plan to establish a Joint Venture in Hong Kong in the first quarter of 2020 to focus on business opportunities in Asia. A memorandum of understanding has been executed between WISeKey and LSI to that effect.

 

Due to LSI’s option to convert the loan in part at each drawdown before maturity, the LSI Convertible Facility was assessed as a debt instrument with an embedded put option. We assessed the put option under ASC 815 and concluded that it is clearly and closely related to its debt host and therefore did not require bifurcation. Per ASC 480-10-25, the LSI Convertible Facility will be accounted for as a liability measured at fair value using the discounted cash flow method for each term loan (corresponding to each drawdown).

 

Total debt issue costs amounting to CHF 56,757 in legal fees and expense allowance were paid by WISeKey in 2019 and 2020, and a commitment fee payable in 400,000 WIHN class B shares was settled on January 23, 2020 with a fair value of CHF 759,200 based on the market price of the WIHN shares at settlement. The debt issue costs and commitment fee will be recorded as a debt discount proportionately to each drawdown. However, as at December 31, 2020, WISeKey had not yet drawn down on the LSI Convertible Facility, therefore, in application of ASC 340-10-S99-1, WISeKey accounted for the debt issue costs of CHF 56,757 and the commitment fee of CHF 759,200 as a deferred asset to be amortized on a straight-line basis over the access period of the LSI Convertible Facility.

 

In 2020, WISeKey did not make any drawdowns under the LSI Convertible Facility.

 

The amortization charge for the capitalized costs and fee recognized in APIC amounted to CHF 443,484 (USD 472,754) for the year to December 31, 2020 and the remaining deferred charge balance was CHF 372,473 (USD 421,210) which was all current.

 

As at December 31, 2020 the outstanding LSI Convertible Facility available was CHF 30.0 million (USD 33.9 million).

 

Loan Agreements with UBS SA

 

On March 26, 2020, two members of the Group entered into the Covid loans to borrow funds under the Swiss Government supported COVID-19 Credit Facility with UBS SA. Under the terms of the Agreement, UBS has lent such Group members a total of CHF 571,500. The loans are repayable in full on March 30, 2028, as amended, being the eighth anniversary of the date of deposit of the funds by UBS, although UBS reserves the right to implement instalments before this date. The interest rate is determined by Swiss COVID-19 Law and currently the Covid loans carry an interest rate of 0%. There were no fees or costs attributed to the Covid loans and as such there is no debt discount of debt premium associated with the loan facility.

 

Under the terms of the loans, the relevant companies are required to use the funds solely to cover the liquidity requirements of the Company. In particular, the Company cannot use the funds for the distribution of dividends and directors' fees as well as the repayment of capital contributions, the granting of active loans; refinancing of private or shareholder loans; the repayment of intra-group loans; or the transfer of guaranteed loans to a group company not having its registered office in Switzerland, whether directly or indirectly linked to applicant.

 

As at December 31, 2020, the outstanding balance on the loans was CHF 571,500 (USD 646,278).

 

Credit Agreement with Nice & Green SA

 

On May 18, 2020, the Group entered into the Nice & Green Facility with Nice & Green pursuant to which WISeKey has the right to draw down up to a maximum of CHF 10 million during a commitment period of 24 months commencing on May 20, 2020, in up to 25 tranches based upon 60% of the traded volume of the WIHN class B share on the SIX Swiss Stock Exchange over the 5 trading days preceding the subscription date. Each tranche is divided into 25 convertible notes that do not bear interest. Subject to a cash redemption right of WISeKey, the convertible notes are mandatorily convertible into WIHN class B shares within the Nice & Green Conversion Period. Conversion takes place upon request by Nice & Green during the Nice & Green Conversion Period, but in any case no later than at the expiry of the Nice & Green Conversion Period, at a conversion price of 95% of the lowest daily volume-weighted average price of a WIHN class B share as traded on the SIX Swiss Exchange during the 10 trading days preceding the relevant conversion date.

 

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Due to Nice & Green’s option to convert the loan in part at any time before maturity, and as there is no limit on the number of shares to be delivered, the Nice & Green Facility was assessed as a share-settled debt instrument with an embedded put option. We assessed the put option under ASC 815 and concluded that it is clearly and closely related to its debt host and therefore did not require bifurcation. Per ASC 480-10-25, the Nice & Green Facility will be accounted for as a liability measured at cost for each term loan (corresponding to each drawdown).

 

Per the terms of the Nice & Green Facility, WISeKey pays to Nice & Green, in cash, a commitment fee of 5% of the amount of each subscription which will be recorded as a debt discount against each subscription (principal). Nice & Green also undertake to pay to WISeKey an incentive fee equal to 10% of the positive difference between the net capital gain and the net capital loss generated by Nice & Green on the sales of WIHN class B shares. The incentive fee income is recorded in the income statement in other non-operating income (see Note 33).

 

During the year to December 31, 2020, the Group made a total of six subscriptions under the terms of the agreement as follows:

 

-On June 17, 2020 for CHF 1,931,355 (USD 2,029,927 at historical rate).

-On July 22, 2020 for CHF 1,239,226 (USD 1,333,867 at historical rate).

-On August 17, 2020 for CHF 2,521,308 (USD 2,783,403 at historical rate).

-On September 18, 2020 for CHF 1,075,000 (USD 1,181,972 at historical rate).

-On October 22, 2020 for CHF 1,075,000 (USD 1,184,872 at historical rate).

-On November 20, 2020 for CHF 1,075,000 (USD 1,179,242 at historical rate).

 

In 2020, Nice & Green issued a total of eleven conversion notices, resulting in the following conversions:

 

-On June 18, 2020 for 2,313,000 WIHN class B shares delivered on June 18, 2020 for a conversion of CHF 1,931,355 (USD 2,030,992 at historical rate).

-On July 30, 2020 for 676,941 WIHN class B shares delivered on July 30, 2020 for a conversion of CHF 793,105 (USD 869,571 at historical rate).

-On August 6, 2020 for 346,555 WIHN class B shares delivered on August 6, 2020 for a conversion of CHF 446,121 (USD 489,965 at historical rate).

-On August 24, 2020 for 115,722 WIHN class B shares delivered on August 24, 2020 for a conversion of CHF 201,705 (USD 221,441 at historical rate).

-On September 11, 2020 for 143,971 WIHN class B shares delivered on September 11, 2020 for a conversion of CHF 201,705 (USD 221,837 at historical rate).

-On September 15, 2020 for 427,340 WIHN class B shares delivered on September 15, 2020 for a conversion of CHF 504,262 (USD 555,103 at historical rate).

-On September 21, 2020 for 427,340 WIHN class B shares delivered on September 21, 2020 for a conversion of CHF 504,262 (USD 550,300 at historical rate).

-On September 29, 2020 for 927,804 WIHN class B shares delivered on September 29, 2020 for a conversion of CHF 1,008,523 (USD 1,094,600 at historical rate).

-On October 12, 2020 for 1,081,740 WIHN class B shares delivered on October 12, 2020 for a conversion of CHF 1,175,852 (USD 1,292,574 at historical rate).

-On November 5, 2020 for 1,158,405 WIHN class B shares delivered on November 5, 2020 for a conversion of CHF 1,075,000 (USD 1,185,993 at historical rate).

-On November 24, 2020 for 1,069,651 WIHN class B shares delivered on November 24, 2020 for a conversion of CHF 1,075,000 (USD 1,178,545 at historical rate).

 

During the year to December 31, 2020, debt discount in the amount of CHF 12,101 (USD 12,900) was amortized to the income statement, whilst CHF 433,743 (USD 490,497) was booked to APIC as per ASC 470-02-40-4. There was no unamortized debt discount outstanding at December 31, 2020.

 

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As at December 31, 2020, the outstanding Nice & Green Facility available was CHF 1,083,111 (USD 1,224,832) and there were no unconverted outstanding loan amounts.

 

New Convertible Loan with Crede CG III, Ltd

 

On August 07, 2020, WISeKey entered into the Crede Convertible Loan with Crede for an amount of USD 5 million. The funds were made available on September 23, 2020. The loan bears a 5% p.a. interest rate, payable in arrears on a quarterly basis starting September 30, 2020, and is repayable in WIHN class B shares any time between September 23, 2020 and the maturity date of August 07, 2022, at Crede’s election. Accrued interests are payable, at WISeKey’s sole election, either in cash or in WIHN class B shares. The conversion price applicable to the prepayment of the principal amount or accrued interest is calculated as 92% of the lowest daily volume weighted average share prices quoted on the SIX Stock Exchange during the 10 trading days immediately preceding the relevant conversion date or interest payment date respectively, disregarding any day on which Crede (or its Affiliates or related party) has effected any trade, converted into USD at the exchange rate reported by Bloomberg at 9 a.m. Swiss time on the relevant conversion date or interest payment date.

 

Due to Crede’s option to convert the loan in part or in full at any time before maturity, the Crede Convertible Loan was assessed as a share-settled debt instrument with an embedded put option. Because the value that Crede will receive at settlement does not vary with the value of the shares, the settlement provision is not considered a conversion option. We assessed the put option under ASC 815 and concluded that it is clearly and closely related to its debt host and therefore did not require bifurcation. Per ASC 480-10-25, the Crede Convertible Loan was accounted for as a liability measured at fair value using the discounted cash flow method at inception.

 

On the date of the Crede Convertible Loan, WISeKey signed an option agreement granting Crede the option to acquire up to 1,675,885 WIHN class B shares at an exercise price set initially at CHF 1.65 but revised down to CHF 1.375 in an amendment signed by both parties on September 18, 2020, exercisable between September 24, 2020 and September 14, 2023. Per the option agreement’s term, the date of grant under US GAAP is September 14, 2020 upon issuance of a Tax Ruling from the Swiss Federal Tax Administration and the Zug tax authority. In line with ASC 470-20-25-2, the proceeds from the convertible debt with a detachable warrant was allocated to the two elements based on the relative fair values of the debt instrument without the warrant and of the warrant at time of issuance. The option agreement was assessed as an equity instrument and was fair valued at grant at an amount of USD 866,046 using the Black-Scholes model and the market price of WIHN class B shares on the date of the amendment, September 18, 2020, of CHF 1.25. The fair value of the debt was calculated using the discounted cash flow method as USD 5,387,271. Applying the relative fair value method per ASC 470-20-25-2, the recognition of the option agreement created a debt discount on the debt host in the amount of USD 692,469, and the credit entry was booked in APIC.

 

In 2020, Crede issued two exercise notices under the Crede Convertible Loan, resulting in the following conversions:

 

-On November 20, 2020 for 220,143 WIHN class B shares delivered on November 25, 2020 for a conversion of USD 219,680.

-On December 18, 2020 for 549,190 WIHN class B shares delivered on December 23, 2020 for a conversion of USD 565,200.

 

As at December 31, 2020, the principal amount outstanding under the Crede Convertible Loan was USD 4,215,120, with unamortized debt discount of USD 504,855. For the year to December 31, 2020, the Group recorded a net debt discount amortization expense in the income statement of USD 90,901.

 

Credit Agreement with GLOBAL TECH OPPORTUNITIES 8

 

On December 08, 2020, WISeKey entered into the GTO Facility, an Agreement for the Issuance and Subscription of Convertible Notes with GTO, pursuant to which GTO commits to grant a loan to WISeKey for up to a maximum amount of CHF 15.5 million divided into tranches of variable sizes, during a commitment period of 18 months ending June 09, 2022. The dates and amounts of the first 3 tranches were agreed in advance in the GTO Facility agreement; for the remaining facility, GTO has the right to request the subscription of 2 tranches, all other tranches are to be subscribed for by WISeKey during the commitment period, subject to certain conditions. Each tranche is divided into convertible notes of CHF 10,000 each that do not bear interest. Subject to a cash redemption right of WISeKey, the convertible notes are mandatorily convertible into WIHN class B shares within the GTO Conversion Period. Conversion takes place upon request by GTO during the GTO Conversion Period, but in any case no later than at the expiry of the GTO Conversion Period, at a conversion price of the higher of (i) CHF 0.05 and (ii) 97% of the average of the 5 lowest closing volume-weighted average price of a Class B Share as traded on the SIX Swiss Exchange during the 20 trading days preceding the relevant conversion date.

 

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Due to GTO’s option to convert the loan in part or in full at any time before maturity, the GTO Facility was assessed as a share-settled debt instrument with an embedded put option. Because the value that GTO will receive at settlement does not vary with the value of the shares, the settlement provision is not considered a conversion option. We assessed the put option under ASC 815 and concluded that it is clearly and closely related to its debt host and therefore did not require bifurcation. Per ASC 480-10-25, the GTO Facility was accounted for as a liability measured at fair value using the discounted cash flow method at inception.

 

Debt issue costs made up of legal expenses of CHF 33,000 and a commitment fee of CHF 697,500, representing 4.5% of the maximum GTO Facility, were due to GTO at inception, payable throughout the commitment period but no later than June 08, 2022. At inception on December 08, 2020, in application of ASC 340-10-S99-1, WISeKey accounted for the debt issue costs of CHF 33,000 and the commitment fee of CHF 697,500 as a deferred asset to be amortized on a straight-line basis over the commitment period (access period) of the GTO Facility. Upon subscription of each tranche, the debt issue costs and commitment fee are recorded as a debt discount proportionately to each tranche amount.

 

Additionally, per the terms of the GTO Facility, upon each tranche subscription, WISeKey will grant GTO the option to acquire WIHN class B shares at an exercise price of the higher of (a) 120% of the 5-trading day VWAP of the WIHN class B shares on the SIX Swiss Stock Exchange over the 5 trading days immediately preceding the relevant subscription request and (b) CHF 1.50 (the “GTO Warrant Exercise Price”). The number of options granted at each tranche subscription is calculated as 15% of the principal amount of each Tranche divided by the GTO Warrant Exercise Price. Each warrant agreement has a 5-year exercise period starting on the relevant subscription date. In line with ASC 470-20-25-2, for each subscription, the proceeds from the convertible notes with a detachable warrant were allocated to the two elements based on the relative fair values of the debt instrument without the warrant and of the warrant at time of issuance. When assessed as an equity instrument, the option agreement is fair valued at grant using the Black-Scholes model and the market price of WIHN class B shares on the date of the subscription. The fair value of the debt is calculated using the discounted cash flow method.

 

During the year to December 31, 2020, the Group made a total of three subscriptions under the terms of the GTO Facility as follows:

 

-On December 09, 2020 for convertibles notes in the amount CHF 750,000 (USD 842,302 at historical rate). The funds were received on December 11, 2020. On December 09, 2020, in line with the terms of the GTO Facility, WISeKey issued GTO with 75,000 warrants on WIHN class B shares at an exercise price of CHF 1.50. The option agreement was assessed as an equity instrument and was fair valued at grant at an amount of CHF 30,000 (USD 33,692) using the Black-Scholes model and the market price of WIHN class B shares on the date of grant of CHF 0.99. The fair value of the debt was calculated using the discounted cash flow method as CHF 726,445 (USD 815,848). Applying the relative fair value method per ASC 470-20-25-2, the recognition of the option agreement created a debt discount on the debt host in the amount of CHF 29,744 (USD 33,405), and the credit entry was booked in APIC.

-On December 21, 2020 for convertibles notes in the amount CHF 1,750,000 (USD 1,975,678 at historical rate). The funds were received on December 28, 2020. On December 21, 2020, in line with the terms of the GTO Facility, WISeKey issued GTO with 175,000 warrants on WIHN class B shares at an exercise price of CHF 1.50. The option agreement was assessed as an equity instrument and was fair valued at grant at an amount of CHF 78,750 (USD 88,906) using the Black-Scholes model and the market price of WIHN class B shares on the date of grant of CHF 1.065. The fair value of the debt was calculated using the discounted cash flow method as CHF 1,695,038 (USD 1,913,628). Applying the relative fair value method per ASC 470-20-25-2, the recognition of the option agreement created a debt discount on the debt host in the amount of CHF 76,773 (USD 86,674), and the credit entry was booked in APIC.

 

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-On December 24, 2020 for convertibles notes in the amount CHF 2,160,000 (USD 2,422,792 at historical rate). The funds were received on December 31, 2020. On December 24, 2020, in line with the terms of the GTO Facility, WISeKey issued GTO with 216,000 warrants on WIHN class B shares at an exercise price of CHF 1.50. The option agreement was assessed as an equity instrument and was fair valued at grant at an amount of CHF 103,680 (USD 116,294) using the Black-Scholes model and the market price of WIHN class B shares on the date of grant of CHF 1.105. The fair value of the debt was calculated using the discounted cash flow method as CHF 2,118,422 (USD 2,376,156). Applying the relative fair value method per ASC 470-20-25-2, the recognition of the option agreement created a debt discount on the debt host in the amount of CHF 100,782 (USD 113,043), and the credit entry was booked in APIC.

 

During the year to December 31, 2020, GTO issued a total of five conversion notices, resulting in the following conversions:

 

-On December 14, 2020 for 50,607 WIHN class B shares delivered on December 18, 2020 for a conversion of CHF 50,000 (USD 56,487).

-On December 18, 2020 for 102,986 WIHN class B shares delivered on December 23, 2020 for a conversion of CHF 100,000 (USD 112,582).

-On December 21, 2020 for 205,973 WIHN class B shares delivered on December 28, 2020 for a conversion of CHF 200,000 (USD 224,801).

-On December 23, 2020 for 205,973 WIHN class B shares delivered on December 28, 2020 for a conversion of CHF 200,000 (USD 224,801).

-On December 29, 2020 for 205,973 WIHN class B shares delivered on December 30, 2020 for a conversion of CHF 200,000 (USD 226,444).

 

We note that GTO sent a conversion notice on December 30, 2020 for 1,802,265 WIHN class B shares representing a conversion of CHF 1,750,000 (USD 1,978,980 at closing rate). The shares were not delivered by December 31, 2020.

 

During the year to December 31, 2020, a debt discount charge of CHF 4,483 (USD 4,779) and deferred charges in the amount of CHF 28,724 (USD 30,620) were amortized to the income statement, and commitment fees of CHF 62,243 (USD 66,351) were booked to APIC as per ASC 470-02-40-4.

 

As at December 31, 2020 the outstanding GTO Facility available was CHF 10,840,000 (USD 12,258,371). Convertible notes in an aggregate amount of CHF 3,910,000 (USD 4,421,608) remained unconverted and the unamortized debt discount balance was CHF 352,912 (USD 399,089), hence a carrying value of CHF 3,557,088 (USD 4,022,519). as at December 31, 2020. The deferred charge balance was CHF 489,437 (USD 553,478).

 

C.Research and Development, Patents and Licenses, Etc.

 

WISeKey's research and development spending totaled USD 6.0 million in the year ended December 31, 2020, USD 6.4 million in the year ended December 31, 2019, and USD 5.3 million in the year ended December 31, 2018. As mentioned in Item 3. Key Information – D. Risk Factors, we need to keep pace with changing technologies in order to maintain and grow our revenue. We currently own 88 individual patents which preserve our technology. Our spending in research and development includes the development of future technologies that we will register legally in the future to develop our patent portfolio and ensure that competitors cannot replicate our technology easily.

 

D.Trend Information

 

Our growth strategy and industry trends are detailed in Item 3. Key Information – B. Business Overview. The uncertainties and material commitments such as financial instruments that are likely to have a material effect on the companies' financial condition are described in Item 3. Key Information – D. Risk Factors and Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital resources.

 

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E.Off-Balance Sheet Arrangements

 

We have no special purpose financing or partnership entities, or other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that is material to investors.

 

F.Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as at December 31, 2020 in USD'000s:

 

  Payments due by period
Contractual obligations Total   Less than 1 year   1-3 years   3-5 years   more than 5 years
Operating and short-term lease obligations 2,997   633   806   711   847
Finance lease obligations 189   125   64   -   -
Debt and convertible note obligations 7,208   6,157   405   646   -
Total contractual obligations 10,394   6,915   1,275   1,357   847

 

Item 6.Directors, Senior Management and Employees

 

A.Directors and Senior Management

 

The following table sets forth the name, date of birth and functions of our non-executive and executive directors, and our senior management as at the date of this annual report. Unless otherwise indicated, the current business address for our executive officers and directors is General-Guisan-Strasse 6, 6300 Zug, Switzerland. Our non-executive and executive directors are elected annually and individually as a matter of law by the shareholders at each Annual General Meeting of the shareholders for a term extending up until the following Annual General Meeting of the shareholders. The last Annual General Meeting of the shareholders was on May 15,2020.

 

Name   Date of birth   Functions in WISeKey   Date first appointed
Non-Executive Directors            
Philippe Doubre   March 24, 1935   Board Member, Member of the Nomination and Compensation Committee  

March 21, 2016

(1999*)

             
David Fergusson   August 15, 1960   Board Member, Chairman of the Nomination and Compensation Committee, Member of the Audit Committee   May 31, 2017
             
Jean-Philippe Ladisa   August 01, 1963   Board Member, Chairman of the Audit Committee   May 15, 2020
             
Eric Pellaton   March 25, 1959   Board Member, Member of the Nomination and Compensation Committee   May 15, 2020
             
Executive Directors            
Carlos Moreira   September 01, 1958   Chairman of the Board of Directors, Member of the Strategy Committee, Founder and Chief Executive Officer  

March 21, 2016

(1999*)

             
Peter Ward   January 05, 1952   Board Member, Member of the Strategy Committee  

March 21, 2016

(2012*)

             
Senior Management            
Pedro Fuentes   November 12, 1969   Chief Security Officer   August 01, 2016

 

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Name   Date of birth   Functions in WISeKey   Date first appointed

Carlos Moreno   March 09, 1964   Vice President of Strategic Partnerships   July 15, 2006*
             
Benjamin Stump   June 17, 1973   Chief Revenue Officer   July 01, 2020
             
Nathalie Verjus   February 19, 1975   Company Secretary and Financial Planning & Reporting Manager   November 01, 2016
             
Bernard Vian   March 22, 1967   General Manager of WISeKey Semiconductors   September 21, 2016**
             
Alexander Zinser   July 17, 1969   Chief Legal Officer   April 09, 2018

 

* Includes board membership and employment at the Company's predecessor holding company of the WISeKey Group, WISeKey SA.

** Joined the WISeKey Group on the acquisition of WISeKey Semiconductors SAS on September 21, 2016.

 

Biographies

 

Directors

 

Carlos Moreira, Founder, Chairman of the Board of Directors and CEO of WISeKey, UN Expert on CyberSecurity and Trust Models for ILO, UN, UNCTAD, ITC/WTO, World Bank, UNDP, ESCAP (83-99). Author, Internet Pioneer; Founder OISTE.org. Founding Member of the "Comité de Pilotage Project E-Voting" of the Geneva Government, Member of the UN Global Compact, Member of the WEF Global Agenda Council. Founding Member WEF Global Growth Companies 2007. WEF New Champion 2007 to 2016, Vice Chair WEF Agenda Council on Illicit Trade 12/15, Member of the Selection Committee for the WEF Growth Companies. Founder of the Geneva Security Forum. Member the WEF Global Agenda Council on the Future of IT Software & Services 2014-16. Member of the New York Forum. Selected as one of the WEF, Trailblazers, Shapers and Innovators, Member of Blockchain Advisory Board of the Government of Mexico. Nominated by Bilan.CH among the 300 most influential persons in Switzerland 2011 and 2013, top 100 of Who's Who of the Net Economy, Most Exciting EU Company at Microsoft MERID 2005, Man of the Year AGEFI 2007, Selected by Bilanz among the 100 most important 2016 digital heads in Switzerland 2017. Award Holder CGI. Adjunct Professor of the Graduate School of Engineering RMIT Australia (95/99). Head of the Trade Efficiency Lab at the Graduate School of Engineering at RMIT.  M&A Award 2017 Best EU acquisition. 2018 Blockchain Davos Award of Excellence by the Global Blockchain Business Council. Member of The Blockchain Research Institute. Founder Blockchain Center of Excellence 2019.  Entrepreneur and investor in disruptive cryptotechnology AI, Blockchain, IoT and Cybersecurity. Keynote speaker at the UN, WEF, CGI, ITU, Bloomberg, Oracle, SAP, Zermatt Summit, Microsoft, IMD, INSEAD, MIT Sloan, HEC, UBS, CEO Summit. Coauthor of "The transHuman Code: How to Program Your Future" (2019).

 

Peter Ward has served our Chief Financial Officer and a director since 2012. Mr. Ward began his tenure with our Company in 2008 as Finance Director. From 2005 to 2008, Mr. Ward served as a director and International Finance Director at Isotis International Inc., a manufacturer and distributor of bone and skin transplants. From 1996 to 2004, Mr. Ward served as a director and International Finance Director, then Director Administration and Taxes of Iomega International, a manufacturer and distributor of external computer drives and disks. From 1986 to 1996, Mr. Ward served as Finance Director for Germany, Austria & Switzerland Finance for GE Information Services (GEISCO), based in Cologne, Germany, then Commercial Finance Manager for GE Plastics BV, based in Bergen op Zoom, The Netherlands and Finance Director for Germany, Austria & Switzerland for GE Medical Services AG, based in Frankfurt am Main, Germany at General Electric. From 1973 to 1985, Mr. Ward served as Cost Analyst at Standard Telephones & Cables Ltd, a manufacturer and installer of submarine telephone cables, based in Southampton, United Kingdom, then Finance Accountant for Payot Cosmetics Ltd and Mavala Cosmetics Ltd, manufacturers of cosmetics and nail products respectively, based in Ashford, Kent, United Kingdom, then Financial Controller for Rimmel Cosmetics Germany and ITT Photoproducts, Germany, distributors of cosmetics and photographic equipment respectively, based in Frankfurt am Main, Germany, then Financial Analyst for the Automotive and Sanitary Products Division, based in ITTE HQ in Brussels, Belgium, then Manager Financial Controls for the Telecommunications Division based in ITTE HQ Brussels, Belgium, at ITTE. He holds a B.A. with honors in Business Administration from Wolverhampton University, in Wolverhampton, U.K. and is a qualified Chartered Management Accountant.

 

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Philippe Doubre is a co-founder of our company and has served as a member of our board since 1999. Mr. Doubre is also the co-founder and Président du Conseil de Fondation of the Organisation Internationale pour la Sécurité des Transactions Electroniques (OISTE), a not-for-profit organization founded in 1998 that promotes digital security and certification of persons and objects. Mr. Doubre serves as vice president and treasurer of the World Trade Point Federation (WTPF), an international non-governmental organization founded in 2000 in partnership with the United Nations Conference on Trade and Development (UNCTAD), which assists small and medium enterprises (SMEs) in over 70 countries worldwide to trade internationally through the use of electronic commerce technologies. Additionally, Mr. Doubre serves as president of the China Hub in Geneva, Switzerland, and a permanent representative of the WTCA organization to the U.N. in Geneva, Switzerland. From 1979 to 2015, Mr. Doubre served as secretary general and then president of the World Trade Centre Geneva, Switzerland, a member of the World Trade Center Association (WTCA). Mr. Doubre served as the co-chairman of the WTCA Committee on Information and Communication, and as a member of the WTCA New York board of directors since 1999. Prior to his role with the WTCA, Mr. Doubre held several senior positions in the banking and finance industry, including vice president and general cashier of American Express Paris, and general manager of the Overseas Development Bank between 1967 and 1970. Mr. Doubre graduated in mathematics from the Collège Saint Barbe in Paris, France.

 

David Fergusson has served as a member of our board since 2017. Since 2010, Mr. Fergusson serves as president and CEO of "The M&A Advisor", the world's premier think tank for corporate finance, mergers & acquisition and restructuring professionals. From London and New York, M. Fergusson leads the company's market intelligence, media, event, and consulting services for a global constituency of over 350,000 finance industry professionals. M. Fergusson is a sought-after speaker and contributor on the subjects of finance, technology and operational innovation with international media, educational institutions and leadership assemblies. A market expert on the impact of technological innovation on corporations, M. Fergusson is also the editor of 5 annual editions of "The Best Practices of the Best Dealmakers" with over 500,000 readers and distribution in over 60 countries. In 2013, Mr. Fergusson founded the global Corporate Finance Emerging Leaders program, which engages future global business stalwarts to affect significant change through social innovation. A pioneer in cross border M&A between the United States and China, he was recognized with the 2017 M&A Leadership Award from the China Mergers & Acquisitions Association and is Chairman of the US Chapter of the Asia M&A Association. Additionally, Mr. Fergusson serves as president-elect of Hugh O'Brien Youth Leadership (HOBY), the world's largest social leadership philanthropic foundation for high school students. He received the 2015 Albert Schweitzer Leadership Award for his work in youth leadership development. Mr. Fergusson is also a founding member of the City of London's Guild of Entrepreneurs, a member of British American Business, and of the Association for Corporate Growth (ACG). Mr. Fergusson is a graduate of Kings College School and the University of Guelph where he earned a Bachelor of Arts in Political Studies.

 

Jean-Philippe Ladisa has served as a member of the Board since May 2020. Mr. Ladisa has over thirty years’ experience in audit, accounting, financial analysis, corporate/personal taxation, payroll and human resources in Switzerland. Mr. Ladisa joined Fiduciaire Wuarin & Chatton SA, an audit and accounting firm in Switzerland, in 1993, first as a director then as a partner. Mr. Ladisa serves as an expert in auditing, tax reporting, advisory for natural and legal persons, application of conventions to avoid double taxation and business valuation with the Geneva Court. Mr. Ladisa started his career managing audit and accounting mandates of small and medium-sized Swiss companies in the construction, trade and services sectors with BFB Sociétés Fiduciaires in Switzerland from 1982 to 1993. Mr. Ladisa graduated in audit from ExpertSuisse in Switzerland, and as a chartered accountant from the Autorité de Surveillance des Réviseurs in Switzerland.

 

Eric Pellaton has served as a member of the Board since May 2020. Mr. Pellaton is an investor in several startup companies involved in different fields: in Real Estate Holdings, Sofia Rental (Bulgaria), a company that buys, sells and manages apartments and a luxury hotel, where has been a partner and investor since 2000; in ZeroBoundary Inc (USA), from 2001 until 2018, a company involved in project management and leadership development products and services, in face-to-face and e-learning delivery formats which he co-founded; in Pelican Packaging (USA), a company involved in die packaging for the semiconductor industry, where he acted as partner and investor from 2002 until 2007; in ACN (Switzerland), a company that develops electronic chips that can transfer inter-net/video/audio information through the power line, and in Seyonics (Switzerland), a company specialized in Nano liter dispensing system (syringe), where, in both cases, he has been acting as investor and advisor since 2003; in Visage Pro USA, a company involved in skin care products with organic cream ranging from anti-aging to burn issues, where he was a partner and investor between 2005 and 2018;and in Solar Rain (USA), a company involved in salt water and dirty water purification systems for drinking water, where he has been a partner and investor since 2008. Prior to that, Mr. Pellaton held different positions from sales, service, management, CEO and Chairman in the field of automation and robotics at Ismeca Group from 1981 to 2000. Ismeca was producing equipment for the Electronic, Medical, Watches and Car Industries all over the world. Mr. Pellaton also owns a patent in RFID technology. Mr. Pellaton graduated as an Electronic/Electro technique Engineer from Ecole Technique Supérieure du Locle, Switzerland.

 

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Senior Management

 

Pedro Fuentes serves as our Chief Security Officer. Mr. Fuentes is responsible for the PKI platforms and compliance, ensuring the worldwide accreditation of WISeKey's certification services, our product strategy, leading projects and customer support worldwide. He is a senior specialist in information security and PKI in particular with more than 20 years of active work in these areas as a certified professional (CISM, ISO27000, MSCP and others). Mr. Fuentes joined WISeKey in 2009 to reinforce the eSecurity Business Unit. Prior to joining WISeKey, he worked at Siemens as responsible for the cybersecurity product line for southern Europe, managing key projects for national identity and leveraging eGovernance services through the integration of eSecurity techniques in business processes. Mr. Fuentes obtained a high degree in Computer Science from the Polytechnic University of Valencia, Spain.

 

Carlos Moreno is our Vice President of Strategic Partnerships. Mr. Moreno has more than 30 years of experience in Sales Engineering, Sales Management and Business Development. He has worked extensively on strategic projects for both national and multinational companies in the public, financial and industrial sectors throughout his career at Banque Worms, Infogestion, Sopra Steria Informatique, Deutsche Bank, Uniface, Compuware and BMC Software. He has held management and executive roles in the areas of people management, sales coaching, market analysis, establishment and implementation of account plans. He joined WISeKey in 2006 as sales director for Switzerland and held several operational positions before being appointed Vice President of Strategic Partnerships to oversee commercial relationships with strategic customers and helm market analysis and go-to-market strategies. He qualified in Business and administration with the Commercial School Nicolas Bouvier in Geneva, Switzerland, and obtained a qualification as Programmer Analyst with the IEPIGE Institute in Geneva, Switzerland.

 

Benjamin Stump serves as Chief Revenue Officer at WISeKey, focused the revenue objectives of the business and responsible for all of Sales and Marketing. Prior to joining WISeKey, Mr. Stump has held executive level positions for OpSec Security, Inc., Westell Technologies, Kentrox Inc., Digicel USA, Telcordia Technologies and started his career with Bellcore. He has dedicated his career to technology advancements and been focused on revenue and growth strategies for more than two decades. Mr. Stump is experienced in both organic and inorganic growth and specialized in digital transformations. Mr. Stump holds a Bachelor of Science from Lafayette College, PA, USA, and a Master of Science, Industrial and Operations Engineering from the University of Michigan, MI, USA.

 

Nathalie Verjus serves as our Company Secretary and Financial Planning & Reporting Manager. A qualified chartered accountant, Ms. Verjus has a solid background in compliance and finance, combined with project management and operational experience. Prior to joining WISeKey, Ms. Verjus worked for Tyco International, where she served as EMEA Controllership Senior Manager, then Finance Transformation Senior Project Manager, before becoming Operational Excellence Lead and Head of a Business Unit. Prior to joining Tyco International, Ms. Verjus spent four years with PricewaterhouseCoopers UK in Audit and Risk Assurance. Prior to joining PricewaterhouseCoopers, Ms. Verjus served as Project Manager and Export Administration Manager for NACCO Industries. In addition to her chartered accountant qualification (ACA) with the Institute of Chartered Accountants in England and Wales (ICAEW), UK, Ms. Verjus holds an MA in International Business Administration for Bournemouth University, UK, and a Master’s in International Business from the EDC Paris Business School in Paris, France.

 

Bernard Vian serves as General Manager of WISeKey Semiconductors. Prior to our acquisition of WISeKey Semiconductors SAS, Mr. Vian served as the Executive Vice President of the Secure Transaction Business Division, Vice President of Business Development and Executive Vice President for Secure Payments at INSIDE Secure SA. He came to INSIDE Secure from Gemplus (now renamed GEMALTO) where he served in several positions in Sales Support and Marketing, in Europe and lately in California where he opened the Gemplus North America headquarter and served as Technical Support Director for 5 years. Mr. Vian joined INSIDE Secure's team in 2002 as Business Development Vice President. He is a graduate of the University of Aix-Marseille, France, with an engineering degree in Electronic Systems.

 

Alexander Zinser serves as Chief Legal Officer. Prior to joining WISeKey, Mr. Zinser served ad-interim at the General Counsel Office for Ernst & Young Switzerland. Prior to joining Ernst & Young Switzerland, Mr. Zinser served as Managing Counsel for SFR Tobacco International GmbH (formerly Reynolds American Group) in Switzerland. Prior to working for SFR Tobacco International GmbH, Mr. Zinser served as Assistant General Counsel Europe at the EMEA headquarter of Guardian Industries Europe S.à.r.l. in Luxembourg. Prior to working for Guardian Industries Europe S.à.r.l., Mr. Zinser served as senior attorney for Agilent Technologies International S.à.r.l., initially in Germany before transferring to the European headquarter in Switzerland. Prior to working for Agilent Technologies International S.à.r.l., Mr. Zinser served as Attorney-at-law for Graf von Westphalen Fritze & Modest in Germany. Mr. Zinser is a qualified Doctor of Laws from the University of Kiel, Germany. He also holds a post-graduate degree in Comparative Law from the University of Strasbourg, France, a diploma in English Law from the University of Birmingham, U.K., a Master of Laws from the University of Huddersfield, U.K., and an Executive MBA from the University of Saint Gallen, Switzerland.

 

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Family Relationship

 

There are no family relationships among any of our executive and non-executive officers or directors.

 

Potential arrangements

 

There are no arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management. However, Carlos Moreira has a significant shareholding in our company as disclosed in "Item 7A. Major Shareholders".

 

B.Compensation

 

Compensation of Directors and Executive Officers

 

We are subject to the Ordinance against Excessive Compensation with respect to Listed Companies issued by the Swiss Federal Council (the "Compensation Ordinance") and the Directive on Information Relating to the Corporate Governance issued by the SIX (the "Corporate Governance Directive"). The Compensation Ordinance requires a "say on pay" approval mechanism for the compensation of the board of directors and the executive management pursuant to which the shareholders must vote on the compensation of the board of directors and the executive management on an annual basis. Accordingly, our Articles provide that the general meeting of shareholders must, each year, vote separately on the proposals by the board of directors regarding the maximum aggregate amounts of:

 

·the total compensation of the board of directors for the next term of office; and

 

·the total compensation of the executive management for the period of the next fiscal year.

 

If the general meeting of shareholders does not approve a proposal of the board of directors, the board of directors determines the maximum aggregate amount or maximum partial amounts taking into account all relevant factors and submits such amounts for approval to the same general meeting of shareholders, to an extraordinary general meeting of shareholders or to the next ordinary general meeting of shareholders for retrospective approval. If the maximum aggregate amount of compensation already approved by the general meeting of shareholders is not sufficient to also cover the compensation of persons newly appointed to or promoted within the executive management, such persons may be paid for each of the following purposes an aggregate of up to 40% in excess of the total annual compensation of the respective predecessor or for a similar pre-existing position: (i) as compensation for the relevant compensation period; and, in addition, (ii) as compensation for any prejudice incurred in connection with the change of employment.

 

For the year ended December 31, 2020, the aggregate compensation paid to the members of our board of directors and our executive officers for services in all capacities was CHF 5,248,000 (USD 5,594,373 at annual average rate). For the year ended December 31, 2020, the compensation of Carlos Moreira, as the company's highest paid executive, was CHF 3,521,000 (USD 3,753,390 at annual average rate).

 

The tables below show the amount of compensation paid and benefits in kind granted to our executive and non-executive directors for the year ended December 31, 2020 as disclosed in our 2020 annual report. We note that Mr. Juan Hernandez-Zayas was a member of our board of directors as at December 31, 2019 but did not seek reelection at the annual general meeting of shareholders on May 15, 2020, which means that his Board duties ceased on May 15, 2020. We also note that Mr. Dourgam Kummer was a member of our board of directors as at December 31, 2019 but resigned on November 30, 2020.

 

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Compensation of the Board of Directors of WISeKey International Holding AG
for the 12 months ending December 31, 2020
CHF'000 1  Function  Board
Fee2
  Additional Fees3  Other Stock Based Compensation4  Total Compensation
Philippe Doubre  Board Member, NCC5 Member   81   -       -   81
David Fergusson  Board Member, NCC Chairman, Audit Committee Member   112   -   -   112
Juan Hernandez Zayas  Former Board Member, Audit Committee Chairman, Strategy Committee Member   49   -   -   49
Dourgam Kummer6  Former Board Member   -   229   -   229
Jean-Philippe Ladisa  Board Member, Audit Committee Chairman   57   -   -   57
Eric Pellaton  Board Member, NCC Member   40   -   -   40
Total Board Members      339   229   -   568
                    

1Board members are remunerated in Swiss Francs (CHF).
  

2

Board fees can be paid in a mix of cash and options. The cash fee voted by the Board as remuneration to Board Members is disclosed in application of the accrual-based principle if not paid as at the end of the reporting period. In 2020, Board members received their full cash compensation up until December 31, 2020. Compensation in options on WIHN Class B Shares is disclosed in the period it was granted, regardless of whether it relates to Board fees from prior financial periods. The amount shown reflects the fair value of options granted in line with US GAAP standards. The options granted were valued using the Black-Scholes method, using the market price of WIHN shares at the relevant date. In 2020, Board members received the options relating to the following Board Term: 2019/2020 and 2020/2021 up until December 31, 2020. The recognition of the compensation in options on a grant-basis as opposed to an accrual-based principle may generate differences between the amount of Board fees accrued in a fiscal period and the amount of Board fees actually paid in respect of that period, at a later stage.

The amount of Board fees includes employer social charges paid by the Company.

 

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3Additional fees relate to services other than Board duties rendered to the Company.

 

4Other stock based compensation refers to stock based compensation for services other than Board services. The amount shown reflects the fair value of options granted in line with US GAAP standards. The options granted were valued using the Black-Scholes method, using the market price of WIHN shares at the relevant date.

 

5Nomination & Compensation Committee

 

6The amount disclosed under Additional Fees for Mr. Kummer relates to his compensation as employee of WISeKey for the period from January 01, 2020 to November 30, 2020.

 

Compensation of the Executive Management of WISeKey International Holding AG
for the 12 months ending December 31, 2020

 

CHF'000 1   Function  

Base

Salary2

 

Annual

Incentive

 

Additional

Fees3

 

Stock Based

Compensation4

 

Other

Compensation5

 

Total

Compensation

Highest Paid Executive                            
Carlos Moreira   Chairman of the Board, Chief Executive Officer   780   2,241   -   -   500   3,521
Peter Ward   Board Member, Chief Financial Officer   585   425   -   -   149   1,159
Total Executive Management       1,365   2,666   -   -   649   4,680
                             

1The executive management members are remunerated in Swiss Francs (CHF).
  

2Base salary includes employee social security costs.
  

3Additional Fees include fees paid for special services rendered to the Company.
  

4The amount shown reflects the fair value of options granted in line with US GAAP standards. The options granted are valued using the Black-Scholes method at the grant date, using the market price of WIHN shares.
  

5Other compensation includes pension contributions, employer social charges, lump-sum expenses and parking charges paid by the Company.

 

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Disclosure of the amount set aside by us to provide pension, retirement or similar benefits to members of our board of directors or executive officers is not required in Switzerland and is not otherwise disclosed by the Company.

 

Disclosure of compensation to our senior management is not required in Switzerland and is not otherwise publicly disclosed by the Company.

 

Annual Incentive Plan

 

Compensation for our executive directors and senior management includes a bonus. Our annual incentive plan is designed to encourage management to achieve pre-established performance goals, both short-term and long-term.

 

The annual incentive plan for our executive directors is approved by our nomination and compensation committee which then submits it for approval by our board of directors. It is included in the total compensation that the shareholders must vote on, on an annual basis, as described above.

 

Share-based Compensation

 

We maintain an Employee Stock Option Plan ("ESOP") which was transferred from WISeKey SA for the benefit of our directors, employees and consultants. Options issued under the ESOP to our directors for compensation entitle the participant to WISeKey Class B shares at the ratio of 1:1, at an exercise price equal to the nominal value of WISeKey Class B shares of CHF 0.05, with immediate vesting and expiring on the seventh anniversary of the grant date. Each grant is subject to the approval of the board of directors who may, in line with the terms and conditions of the ESOP, amend the terms of the grant.

 

C.Board Practices

 

Our articles of association provide that our board of directors consists of a minimum of three and a maximum of 12 directors. Our board of directors currently consists of six members. Each director is elected for a one-year term. The current members of our board of directors were elected at an annual shareholders' meeting held on May 15, 2020 to serve until our next annual general shareholders meeting and until their successors are elected at such next annual general meeting. Please also refer to Item 6.A. Directors and Senior Management above for further details regarding the periods of service of each of our current directors and senior managers.

 

Other than with respect to our directors that are also executive officers, we do not have written agreements with any director providing for benefits upon the termination of his or her engagement with our company.

 

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under NASDAQ’s rules for domestic U.S. issuers, provided that we disclose which requirements we are not following and describe the equivalent home country requirement.

 

Board Independence

 

Currently, 4 of our 6 directors, Philippe Doubre, David Fergusson, Jean-Philippe Ladisa and Eric Pellaton, are considered "independent" under the NASDAQ rules, therefore we comply with NASDAQ Listing Rule 5605 (b)(1) which requires an issuer to maintain a majority of independent directors. Under the Swiss Code of Best Practice for Corporate Governance (the "Swiss Code"), which is a non-binding set of corporate governance recommendations issued by economiessuisse and addressed to Swiss public companies, the majority of the board of directors is recommended to be independent. Members of the board of directors are considered independent under the Swiss Code if they are non-executive members of the Board of Directors who have never been a member of the company's executive management, or who were not members of the company's executive management during the preceding three years, and who have no or only comparatively minor business relations with the company. The Swiss Code is not binding and follows a "comply or explain" principle. We are not subject to NASDAQ Listing Rule 5605 (b)(2) that requires that independent directors must have regularly scheduled meetings at which only independent directors are present.

 

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Board Committees

 

Our board of directors has established an audit committee, a nomination and compensation committee, and a strategy committee.

 

Audit Committee

 

The audit committee consists of Jean-Philippe Ladisa (Chairman) and David Fergusson. The Audit Committee currently consists of only two members. Swiss statutory law does not require a specific number of Audit Committee members and therefore our practice varies from NASDAQ Listing Rule 5605(c)(2) which requires an Audit Committee of at least three members. The audit committee consists exclusively of members of our board of directors who are financially literate. Our board of directors has determined that all members of the audit committee satisfy the "independence" requirements set forth in Rule 10A-3 under the Exchange Act and under the rules of NASDAQ. The members of the audit committee are appointed by our board of directors. The Audit Committee has a charter that complies with Swiss law, but does not fully comply with the requirements of NASDAQ Listing Rule 5605(c)(1).

 

The audit committee is responsible for, among other things:

 

·overseeing our accounting and financial reporting processes and the audits of our financial statements;

 

·the compensation, retention and oversight of the work of our independent registered public accounting firm and statutory auditors who are appointed by the shareholders pursuant to Swiss corporate law;

 

·our accounting policies, financial reporting and disclosure controls and procedures;

 

·the quality, adequacy and scope of external audit;

 

·our accounting compliance with financial reporting requirements; and

 

·the management's approach to internal controls with respect to the production and integrity of the financial statements and disclosure of our financial performance.

 

Nomination and Compensation Committee

 

Our nomination and compensation committee consists of David Fergusson (Chairman), Philippe Doubre and Eric Pellaton. Our board of directors has determined that each of the members of the nomination and compensation committee is independent under NASDAQ’s listing standards. We follow our home country standards with respect to the responsibilities of our Nomination and Compensation Committee. Our board of directors has adopted a charter for the Nomination and Compensation Committee that complies with Swiss law but, which does not, however, fully comply with the requirements of NASDAQ Listing Rules 5605(d)(1) and (d)(3). Thus, the Nomination and Compensation Committee practice varies from the requirements of NASDAQ Listing Rules 5605(d)(1) and (d)(3).

 

The primary purpose of our nomination and compensation committee is to discharge our board of directors' responsibilities to oversee our compensation policies, plans and programs, and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. We are subject to the Swiss Ordinance against Excessive Compensation in Listed Companies (the "Compensation Ordinance") issued by the Swiss Federal Council, known as the "say-on-pay" rule. As a result of the say-on-pay rule, the members of the nomination and compensation committee must be elected by our shareholders at the annual general meeting for a one-year term and the aggregate compensation of our board of directors and executive officers must also be approved by our shareholders. Pursuant to the Swiss Code, all members of a nomination committee must be independent.

 

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The nomination and compensation committee is responsible, among other things to:

 

·review and recommend to our board of directors the compensation of our directors based on the aggregate compensation approved by our shareholders;

 

·review and approve, or recommend that our board of directors approve, the terms of compensatory arrangements with our executive officers;

 

·review and approve, or recommend that our board of directors approve, incentive compensation and equity plans, and any other compensatory arrangements for our executive officers and other senior management, as appropriate;

 

·identify, evaluate and select, or recommend that our board of directors approve, nominees for election to our board of directors and new members of the executive management and their terms of employment; and

 

·consider and make recommendations to our board of directors regarding the composition of the committees of the board of directors.

 

Strategy Committee

 

Our strategy committee currently consists of two members of the board of directors: Carlos Moreira (Chairman) and Peter Ward. The strategy committee advises the board of directors on all strategic matters, including acquisitions, divestments, joint ventures, restructurings and similar matters. The strategy committee continuously reviews our strategic direction and assesses the impact of changes in the environment on us. The members of the Strategy Committee are appointed by our board of directors.

 

Quorum requirements

 

In accordance with Swiss law and generally accepted business practices, our Articles of Association do not provide for quorum requirements generally applicable to general meeting of shareholders. Our practice varies from NASDAQ Listing Rule 5620(c), which requires an issuer to provide in its bylaws for a generally applicable quorum, and that such quorum may not be less than one-third of the outstanding voting stock.

 

Solicitation of proxies

 

Our Articles of Association provide for an independent proxy holder elected by the shareholders at a general meeting of shareholders and prohibit, in accordance with Swiss law, the institutional representation of shareholders by our corporate representatives at a general meeting of shareholders. We must further submit to shareholders an invitation to the general meeting twenty calendar days prior to the general meeting date, indicate in such invitation the items on the agenda of the general meeting and provide together therewith other relevant documents for the general meeting, such as our annual report, the meeting admission card and the proxy card. However, Swiss law does not have a regulatory regime for the solicitation of proxies and thus, our practice varies from NASDAQ Listing Rule 5620(b) that sets forth certain requirements regarding the solicitation of proxies.

 

Shareholder approval

 

Under Swiss law, we are not generally required to obtain shareholder approval for the issuance of securities in connection with certain events such as the acquisition of stock or assets of another company, the establishment of or amendments to equity-based compensation plans for employees, a change of control and certain private placements. While Swiss law does broadly require us to obtain shareholder approval for any issuance of new shares, irrespective of the relevant event, Swiss law permits us to rely in certain circumstances on a share issuance pre-authorization of shareholders granted to our board of directors prior to the occurrence of events of the aforementioned nature. Further, we have, in accordance with Swiss law, opted out from the statutory requirement that an acquirer of voting rights attached to our shares exceeding 33 1/3% - the relevant "change of control" threshold under Swiss law for public companies – submit a mandatory public takeover offer to our shareholders. To some extent, our practice therefore varies from the requirements of NASDAQ Listing Rule 5635, which generally requires an issuer to obtain shareholder approval for the issuance of securities in connection with such events.

 

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Third party compensation

 

Swiss law does not require that we disclose information regarding third party compensation of our directors or director nominees, except where, in each case with respect to serving directors, such compensation directly or indirectly affects (potential) assets of the Company or one of its subsidiaries, or where because of the third party compensation a risk of conflicts of interest or dependency of the director on such third party exists. As a result, our practice varies from the third party compensation requirements of NASDAQ Listing Rule 5250(b)(3).

 

Related party transactions

 

Our board of directors, or a committee of our board of directors composed of directors not subject to the potential conflict, is required to conduct an appropriate review and oversight of all related party transactions for potential conflict of interest situations on an ongoing basis.

 

Voting Rights

 

We do not have the authority to disparately reduce or restrict the voting rights of existing stockholders of our listed common stock (Class B), including by issuing (a) stock with voting rights that are superior to those of outstanding listed common stock or (b) stock with voting rights that are inferior to those of outstanding listed common stock through an exchange offer, except where the general meeting of shareholders resolves, with a majority of two-thirds of voting rights associated with the shares, and the absolute majority of the par value of the shares, in each case as represented at the general meeting of shareholders, on the issuance of privileged voting rights stock, including as part of a separate class of stock.

 

Code of Conduct

 

We have followed Swiss law which does not require a company to have a Code of Conduct applicable to all directors, officers and employees. As a result, our practice varies from NASDAQ Listing Rule 5610 which requires a publicly available Code of Conduct. We do, however, expect ethical behavior from all of our directors, officers and employees.

 

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D.Employees

 

As at December 31, 2020, date of our last audited financial statements, we had 81 employees, of which 19 were located in Switzerland and 53 were located in France. The following table shows the breakdown of our workforce of employees and contractors by category of activity as at the dates indicated:

 

Headcount breakdown  As at December 31,
Area of Activity  2020  2019  2018
Cost of sales   5    4    13 
Research and development   27    29    42 
Selling and marketing   24    23    45 
General and administrative   25    28    54 
Total   81    84    154 

 

With respect to French employees, French labor laws govern the length of the workday and workweek, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination laws and other conditions of employment. French labor laws also impose the creation of a worker's council for companies employing 50 people or more. One employee of WISeKey Semiconductors SAS represents labor unions at the workers' council.

 

As at December 31, 2020, we also have 17 independent contractors in Vietnam and 2 in France. We maintain close cooperation with each of these independent contractors.

 

We have never experienced any labor-related work stoppages or strikes and believe our relationships with our employees and independent contractors are agreeable.

 

E.Share Ownership

 

See Item 7.A. Major Shareholders for a list of beneficial ownership of our shares as at December 31, 2020.

 

The table below shows the beneficial share ownership of the persons listed in above subsection 6.B, including any shareholding by their related parties.

 

 

As at December 31, 2020 

Name Number of Class A Shares held   Percentage of Class A Shares(1)   Number of Class B Shares held   Percentage of Class B Shares(1)   Number of options held(2)
Non-Executive Directors                  
Philippe Doubre 701,695   1.8   *   *   72,694
David Fergusson -   -   *   *   63,644
Jean-Philippe Ladisa -   -   *   *   25,212
Eric Pellaton -   -   *   *   7,231(3)
                   
Executive Directors                  
Carlos Moreira 38,508,733   96.2   991,179(4)   2.1   22,000(5)
Peter Ward *   *   *   *   573,400
                   
Senior Management                  
Pedro Fuentes -   -   -   -   123,495
Carlos Moreno -   -   -   -   152,000
Benjamin Stump -   -   -   -   100,000
Nathalie Verjus -   -   *   *   -
Bernard Vian -   -   -   -   -
Alexander Zinser -   -   *   *   -

 

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*Shareholding less than one percent of the class of shares and that has not been disclosed to shareholders or otherwise made public.

(1)Based on the total number of fully paid-in outstanding shares, in line with our share capital registered with the commercial register of the Canton of Zug as at December 31, 2020.

(2)Each option giving right to one Class B Share upon exercise.

(3)Excluding 8,299 options pending agreement and therefore not considered as granted under US GAAP as at December 31, 2020

(4)Includes 44,000 shares held by an immediate family member.

(5)Includes 22,000 options held by an immediate family member.

 

The terms of the options held by directors and senior management are described in the following table:

 

Name Number of options held(2)   Exercise price of option   Expiration date of options
Non-Executive Directors          
Philippe Doubre 17,317     CHF 0.05   February 11, 2026
Philippe Doubre 18,996     CHF 0.05   December 23, 2026
Philippe Doubre 5,713     CHF 0.05   April 23, 2027
Philippe Doubre 7,033     CHF 0.05   August 23, 2027
Philippe Doubre 10,187     CHF 0.05   November 16, 2027
Philippe Doubre 13,448     CHF 0.05   December 23, 2027
David Fergusson 11,052     CHF 0.05   February 11, 2026
David Fergusson 18,214     CHF 0.05   December 23, 2026
David Fergusson 5,381     CHF 0.05   April 23, 2027
David Fergusson 6,624     CHF 0.05   August 23, 2027
David Fergusson 9,589     CHF 0.05   November 16, 2027
David Fergusson 12,784     CHF 0.05   December 23, 2027
Jean-Philippe Ladisa 2,296     CHF 0.05   August 23, 2027
Jean-Philippe Ladisa 7,572     CHF 0.05   November 16, 2027
Jean-Philippe Ladisa 15,344     CHF 0.05   December 23, 2027
Eric Pellaton 1,682     CHF 0.05   August 23, 2027
Eric Pellaton 5,549     CHF 0.05   November 16, 2027
           
Executive Directors          
Carlos Moreira 22,000(5)     CHF 0.05   September 26, 2026
Peter Ward 573,400     CHF 0.05   September 26, 2026
           
Senior Management          
Pedro Fuentes 123,495     CHF 0.05   September 26, 2026
Carlos Moreno 152,000     CHF 0.05   September 26, 2026
Benjamin Stump 100,000     CHF 0.05   June 30, 2027

 

(2)Each option giving right to one Class B Share upon exercise.

(5)Includes 22,000 options held by immediate family members.

 

Each Class A Share and each Class B Share give their respective owner one voting right.

 

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Summary of Stock Plans

 

Employee Share Option Plan

 

We have the WISeKey Employee Share Option Plan in place, last amended on September 29, 2016 (the "WISeKey Share Ownership Plan"). The WISeKey Share Ownership Plan was originally adopted by WISeKey SA on January 1, 2012 as a continuation of the existing Stock Option Plans approved on December 31, 2007 and December 31, 2011, respectively, and, upon the listing of the Class B Shares on the SIX, amended to reflect the fact that WISeKey International Holding Ltd is the ultimate parent of the Group.

 

Administration

 

Our board of directors administers the WISeKey Share Ownership Plan and has full power to construe and interpret the WISeKey Share Ownership Plan, establish and amend rules and regulations for the administration thereof, and perform all other actions relating thereto. Under the WISeKey Share Ownership Plan, the members of the board of directors and executive management as well as other employees, advisors, consultants and other persons providing services to us (the "Participants") may be granted options that entitle the respective Participant to receive a certain number of Class B Shares.

 

Subject in particular to the limitations which may be determined from time to time by the board of directors, options granted to Participants shall vest gradually on a straight line basis over a period of three years from the grant date, provided, however, that the Participant may not exercise any options during the first year of employment or contractual relationship. Our board of directors may set shorter vesting periods for any Participant. The exercise period shall be seven years. Subject to certain exceptions, upon termination of the employment or contractual relationship between us or any of its subsidiaries or by the Participant, all options that are not vested held by the Participant shall be immediately forfeited without value, while vested options may be exercised by the Participant pursuant to the WISeKey Share Ownership Plan during a period of thirty days after the end of the employment or contractual relationship. The board of directors may grant options to employees, members of management and consultants, whose terms and conditions deviate from the WISeKey Share Ownership Plan.

 

Authorized Shares

 

As at December 31, 2020, the maximum number of our Class B Shares that may be issued out of our conditional capital under our WISeKey Share Ownership Plan is 6,877,699 Class B Shares based on the share capital of the Company registered with the commercial register of the Canton of Zug as at December 31, 2020.

 

Under the current plan, as at December 31, 2020, we had a total number of 1,987,330 options outstanding, vested and nonvested, each of which entitles the respective Participant to receive an equal number of Class B Shares. Of these options, 559,886 have been granted to our advisors and 1,427,444 to our employees, contractors or Board members. As of December 31, 2020, no options had been exercised out of our conditional capital under our WISeKey Share Ownership Plan but not yet registered with the commercial register of the Canton of Zug as at December 31, 2020.

 

Plan Amendment or Termination

 

Our board of directors has the authority to amend, suspend, or terminate our WISeKey Share Ownership Plan, provided that such action does not materially impair the existing rights of any Participant without such Participant's written consent.

 

For further information on the compensation of our directors and executive officers, see "Item 6B. Compensation" and for further information on our shareholders and related party transactions policy, see "Item 7. Major Shareholders and Related Party Transactions."

 

Item 7.Major Shareholders and Related Party Transactions

 

A.Major Shareholders

 

The following table sets forth information with respect to the beneficial ownership of our Class A and Class B Shares as at December 31, 2020 for each beneficial owner of 3% or more of our Class A and Class B Shares in line with the Swiss Financial Market Infrastructure Act ("FMIA") and the rules and regulations promulgated thereunder.

 

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Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares issuable upon the exercise of options, warrants or other rights that are immediately exercisable or exercisable within 60 days of April 12, 2021. Percentage ownership calculations for each beneficial owner are based on 40,021,988 fully-paid and outstanding Class A Shares and 59,734,017 fully-paid and outstanding Class B Shares, as issued as at April 12, 2021, increased by the shares issuable to such beneficial owner within 60 days of April 12, 2021.

 

Name of beneficial owner   Total Class A Shares   Total Class B Shares   Total % of Outstanding Class A Shares(1)   Total % of Outstanding Class B Shares(1)  

% Voting

Power(2)

Carlos Moreira   38,508,733   1,019,179(3)   96.2   1.7   39.7
Pierre Vannineuse   -   3,163,102(4)   -   5.1   3.1
Terren S. Petzer   -   2,084,132(5)   -   3.4   2.1

 

(1)        Based on the total number of fully paid-in outstanding Class A Shares and Class B Shares as issued as at April 12, 2021, increased, for each beneficial owner, by the shares issuable to such beneficial owner within 60 days of April 12, 2021.

 

(2)       Based on the total number of fully paid-in outstanding Class A Shares and Class B Shares as issued as at April 12, 2021, increased, for each beneficial owner, by the shares issuable to such beneficial owner within 60 days of April 12, 2021, less 214,599 Class B shares held as treasury shares as at April 12, 2021.

 

(3)       This total includes 44,000 shares and 22,000 options held by Mr. Moreira’s immediate family members. The options are immediately exercisable, subject to the holder not being in a restricted period. Each option gives the holder the right to acquire one Class B share. If Mr. Moreira were to convert all of his Class A Shares into Class B Shares assuming a conversion ratio of 5:1, he would beneficially own 8,720,925 Class B Shares, which would be 12.9% of the total percentage of outstanding Class B Shares increased by the 7,701,746 Class B Shares that would result from the conversion of Mr. Moreira’s Class A Shares and the 22,000 Class B Shares that would result from the conversion of the options held by an immediate family member, and 8.1% of the voting power based on the total number of fully paid-in outstanding Class A Shares and Class B Shares as issued as at April 12, 2021, increased by the 7,701,746 Class B Shares that would result from the conversion of Mr. Moreira’s Class A Shares and the 22,000 Class B Shares that would result from the conversion of the options held by an immediate family member, less 214,599 Class B shares held as treasury shares as at April 12, 2021.

 

(4)       This total is based on the information known to the Company and includes 2,546,864 Class B Shares that would be immediately issuable or issuable within 60 days of April 12, 2021 in relation to options and convertible instruments beneficially held by Mr. Vannineuse.

 

(5)       This total is based on the information known to the Company and includes 2,084,132 Class B Shares that would be immediately issuable or issuable within 60 days of April 12, 2021 in relation to options beneficially held by Mr. Petzer.

 

Regarding significant changes in the percentage ownership held by any major shareholders during the past three years, on incorporation in November 2015, our Chairman and CEO, Carlos Moreira contributed the full capital amount and was therefore the sole owner of the 10,000,000 Class A shares created in our company. On March 02, 2016, Mr. Moreira contributed his shares in WiseTrust SA to us in consideration for our issuance to him of 30,021,988 Class A Shares, which brought his total shareholding in our company to 40,021,988 Class A Shares (see below Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions). As a result, prior to the reverse acquisition on March 22, 2016 whereby WISeKey International Holding AG acquired the operations of WISeKey SA, Carlos Moreira held 100% of the share capital and voting rights of the 'empty shell' company WISeKey International Holding Ltd consisting of 40,021,988 Class A Shares. With the reverse acquisition, Carlos Moreira converted his shareholding in WISeKey SA into WISeKey International Holding Ltd Class B Shares at the same terms and conditions of exchange offered to all WISeKey SA shareholders, which increased his shareholding in our company by 160,700 Class B Shares representing 1.2% of outstanding Class B Shares and bringing his voting rights to 74.3% as at March 22, 2016. Then upon the listing of our company on March 31, 2016, Carlos Moreira entered into a lock-up agreement with several shareholders of Class B Shares whereby Mr. Moreira exchanged 11,421,320 of his Class A Shares for 2,284,264 Class B Shares corresponding to a ratio of 5:1. This brought Mr. Moreira's holding respectively to 71.5% of outstanding Class A Shares and 16.6% of outstanding Class B Shares, and his voting right to 56.8%, after the listing, as at March 31, 2016. Simultaneously, each of the holders of Class A Shares entered into an agreement with the Company, according to which such shareholder had given an undertaking not to sell or otherwise dispose of the Class A Shares. During the year 2017, Mr. Moreira carried out another exchange of 1,956,602 Class B Shares for 9,783,015 Class A Shares, bringing his ownership to 95.9% of outstanding Class A Shares and 2.0% of outstanding Class B Shares, and his voting right to 60.2% as at December 31, 2017. In 2018, a combination of exchange of Class B Shares for Class A Shares and sale of Class B shares to the company as debt repayment changed Mr. Moreira's shareholding to 38,508,733 Class A Shares and 259,995 Class B Shares, respectively 96.2% of outstanding Class A Shares and 0.9% of outstanding Class B Shares. In 2019, Mr Moreira was granted 693,184 options under the company’s ESOP. In 2020, Mr. Moreira exercised the 693,184 ESOP options he held bringing Mr. Moreira's shareholding to the position disclosed in the above table as at December 31, 2020.

 

Our major shareholder does not have different voting rights than other shareholders of the same class of shares.

 

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As at December 31, 2020, based on the list of registered shareholders, there were 5 record holders of our Class B shares showing as residing in the U.S., holding 7,658,618 of our Class B Shares, representing approximately 16.1% of our outstanding Class B Shares. This includes 7,182,726 Class B Shares held under the name of The Bank of New York Mellon, the U.S. depositary bank for our ADSs, for which we have no information on the country of residency of the beneficial owners of such ADSs.

 

We are not aware of any arrangement that may, at a subsequent date, result in a change of our control.

 

B.Related Party Transactions

 

Our Formation

 

WISeKey International Holdings Ltd. was constituted as our parent company through a series of transactions commencing in March 2016.

 

Contribution of Shares of WiseTrust SA

 

On incorporation in November 2015, our Chairman and CEO, Carlos Moreira contributed the full capital amount and was therefore the sole owner of the 10,000,000 Class A Shares created in our Company.

 

As of March 01, 2016, Carlos Moreira held 100% of the equity interests in WISeTrust SA, a company that held the following assets:

 

·a 19.4% interest in WISeKey SA, our predecessor;

 

·the U.S. distribution rights to technology offered by WISeKey SA; and

 

·a 50% equity interest in WISeKey USA, Inc., an operating company incorporated in Delaware, with a focus on business opportunities in the United States, with the other 50% interest being held by WISeKey SA.

 

On March 02, 2016, Mr. Moreira contributed his shares in WiseTrust SA to us in consideration for our issuance to him of 30,021,988 Class A Shares, which brought his total shareholding in our company to 40,021,988 Class A Shares. The valuation of WiseTrust SA was based on its net assets as at December 31, 2015.

 

In March 2016, WISeKey International Holding Ltd acquired the entire equity interest of WISe Trust SA against the issuance of 40,021,988 new shares, which, under the Articles, are now Class A Shares. As a result, the Company acquired:

 

·the U.S. distribution rights pertaining to the technology offered by WISeKey;

 

·WISeTrust SA's 50% equity interest in WISeKey USA, Inc., an operating company incorporated in Delaware, with a focus on business opportunities in the United States; the other 50% interest in WISeKey USA, Inc., is held by WISeKey SA.

 

·WISeTrust SA's entire equity interest in WISeKey SA, which at the time of the contribution represented approximately 19.4% of WISeKey SA's issued share capital.

 

WISeTrust SA was originally the founders company incorporated before WISeKey SA and majority shareholders of WISeKey SA. When the founders incorporated WISeKey, they transferred the international distribution rights pertaining to the technology to WISeKey SA with the exclusion of the US territory. Now WISeKey International Holding Ltd owns 100% of all distributions rights.

 

________________________

 

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Structure of the company pre-contribution of the WiseTrust SA shares:

 

 

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Structure of the company post-contribution of the WiseTrust SA shares:

 

 

Contribution of Shares of WISeKey SA

 

In March 2016, immediately following the contribution of shares of WiseTrust SA by Carlos Moreira described above, the holders of 90.9% of the remaining outstanding shares of WISeKey SA, with a nominal value of CHF 0.01 per share, contributed their shares to us in exchange for 13,234,027 of our Class B Shares with a nominal value of CHF 0.05 per share. This represented an exchange ratio of one of our Class B Shares for each five shares of WISeKey SA contributed, corresponding to the ratio of the nominal value of one WISeKey SA share to the nominal value of one of our Class B Shares.

 

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The structure of our company after the March 2016 share exchange described above was as follows:

 

 

In September 2017, following bilateral negotiations, the holders of 4.51% of the shares of WISeKey SA that had not previously exchanged their shares contributed their shares to us in exchange for 841,069 of our Class B Shares. This represented an exchange ratio of one of our Class B Shares for each five shares of WISeKey SA. This ratio was determined based on a fairness opinion established by an independent financial advisor by applying the "Praktikermethode". According to this methodology, (i) the valuation of our assets and (ii) the revenues of each of our subsidiaries were valued relative to our total market capitalization as at September 20, 2017, and our total revenues for the six months ended June 30, 2017, respectively. The asset and revenues value have been weighted appropriately, and based on this relative value, the total equity value of WISeKey SA has been determined. The total equity value of WISeKey SA amounted to 22.4% of our market capitalization, which supported the exchange ratio of 1:5. Nearly all of these shareholders committed not to transfer, sell, or otherwise dispose of the Class B Shares obtained as a result of the share exchange until June 30, 2018.

 

In the year ending December 31, 2019, the holders of 0.23% of the shares of WISeKey SA that had not previously exchanged their shares contributed their shares to us in exchange for 60,394 of our Class B Shares. The exchange ratio of our Class B Shares for WISeKey SA shares was calculated based on the company’s capitalization at the time of the transaction.

 

In the year ending December 31, 2020, the holder of less than 0.01% of the shares of WISeKey SA that had not previously exchanged their shares contributed their shares to us in exchange for 16,323 of our Class B Shares. The exchange ratio of our Class B Shares for WISeKey SA shares was calculated based on the company’s capitalization at the time of the transaction.

 

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The structure of our company after the 2020 share exchange described above was as follows:

 

 

We do not currently hold the remaining 4.25% of the outstanding equity interest in WISeKey SA which is held by approximately 30 shareholders. We may elect to acquire these shares in the future through further bilateral negotiations or through a squeeze-out merger pursuant to the Swiss Merger Act. The exchange ratio in connection with either such transaction would be determined at the time.

 

The table below includes a brief description of our group subsidiaries:

 

                % ownership   % ownership    
Group Company Name   Country of    Year of   Share Capital   as at December   as at December 31,   Nature of business
    incorporation   incorporation           31, 2020   2019    
WISeKey SA   Switzerland   1999   CHF   933,436   95.75%   95.58%   Main operating company . Sales and R&D services
WISeKey Semiconductors SAS   France   2010   EUR   1,298,162   100.0%   100.0%   Chip manufacturing, sales & distribution
WiseTrust SA   Switzerland   1999   CHF   680,000   100.0%   100.0%   Non-operating investment company
WISeKey ELA SL   Spain   2006   EUR   4,000,000   100.0%   100.0%   Sales & support
WISeKey SAARC Ltd   U.K.   2016   GBP   100,000   51.0%   51.0%   Non trading
WISeKey USA Inc*   U.S.A   2006   USD   6,500   100% *   100% *   Sales & support
WISeKey India Private Ltd**   India   2016   INR   1,000,000   45.9%   45.9%   Sales & support
WISeKey IoT Japan KK   Japan   2017   JPY   1,000,000   100.0%   100.0%   Sales & distribution
WISeKey IoT Taiwan   Taiwan   2017   TWD   100,000   100.0%   100.0%   Sales & distribution
WISeCoin AG   Switzerland   2018   CHF   100,000   90.0%   90.0%   Sales & distribution
WISeKey Equities AG   Switzerland   2018   CHF   100,000   100.0%   100.0%   Financing, Sales & distribution
WISeCoin France R&D Lab SAS   France   2019   EUR   10,000   90.0%   90.0%   Research & development
WISeKey Semiconductors GmbH   Germany   2019   EUR   25,000   100.0%   100.0%   Sales & distribution
WISeKey Arabia - Information Technology Ltd   Saudi Arabia   2019   SAR   200,000.00   51.0%   51.0%   Sales & distribution
WiseAI AG   Switzerland   2020   CHF   100,000   51.0%   not incorporated   Sales & distribution

 

* 50% owned by WISeKey SA and 50% ow ned by WiseTrust SA

** 88% owned by WISeKey SAARC w hich is controlled by WISeKey International Holding AG

 

Sale of Class A Shares

 

In September 2017 and February 2018, the board of directors released previous holders of Class A Shares from the contractual transfer restrictions existing pursuant to shareholders agreement to enable such holders to enter into private transactions with Carlos Moreira to exchange their Class A Shares for Class B Shares held by Carlos Moreira. The table below shows the composition of the holders of Class A Shares on the basis of the execution of these private share exchange transactions.

 

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Name of Shareholder 

Number of Class

A Shares Held

  % of Share Capital Registered in the Commercial Register*  % Voting Rights**
Philippe Doubre   701,695    0.38%   0.8%
Dourgam Kummer   626,085    0.34%   0.8%
Carlos Moreira   38,508,733    20.91%   46.5%
Peter Ward   185,475    0.10%   0.2%
Total as a Group   40,021,988    21.73%   48.3%
                

*        Based on the total number of fully paid-in outstanding Class A Shares and Class B Shares, as reflected in our share capital registered with the commercial register of the Canton of Zug as at December 31, 2020.

 

**       Based on the total number of fully paid-in outstanding Class A Shares and Class B Shares, as reflected in our share capital registered with the commercial register of the Canton of Zug as at December 31, 2020, less 4,783,135 Class B shares held as treasury shares as at December 31, 2020.

 

Each of the above holders of Class A Shares is bound by an agreement with us, according to which such shareholder has made the undertaking not to sell or otherwise dispose of Class A Shares. However, each of the above shareholders has the right to request that at an item be included on the agenda of our annual general meeting of shareholders, according to which Class A Shares will be, at the discretion of each holder of Class A Shares, converted into Class B Shares, which are not subject to the agreed transfer restrictions.

 

Relationship with the International Organization for Secure Electronic Transactions

 

The Organisation Internationale pour la Sécurité des Transactions Electroniques, or OISTE, is a Swiss non-profit foundation that owns the cryptographic rootkey we use. OISTE is acting as a trusted third party and not-for-profit entity in charge of ensuring that the Root of Trust remains neutral and trusted. Two members of the foundation board of OISTE are also board members of our company: Carlos Moreira and Philippe Doubre. The board of the OISTE foundation acts as a supervisory authority to ensure that the foundation acts in accordance with its purpose, and complies with its articles of association and Swiss law. It also reviews the audited annual accounts and the annual report of the foundation. Under Swiss law, the members of the board of a Swiss non-profit foundation are required to ensure that OISTE, as a Swiss non-profit foundation, is independent of control by any third party.

 

The OISTE foundation's board members are elected by a majority of the current active board members and, once elected, the member serves for an indeterminate period of time. The OISTE foundation has a full General Corporate Governance Manual which covers the distribution of responsibilities within the management structure, executive representation inclusive of the foundation Board Members and Policy Approval Authority Board Members, and the signing authorities of the foundation.

 

The OISTE foundation has no commercial activities and it uses its funding to organize events and launch Internet security projects with the UN, the World Economic Forum and other NGOs. The OISTE foundation board members do not make any decisions on behalf of the OISTE foundation and serve as guardians to ensure the foundation complies with its articles of association and carries out activities towards its stated purpose. We believe that this ensures that no conflicts of interest may arise for the three board members of WISeKey who serve as board members of the OISTE foundation.

 

The OISTE foundation has a second board, the “Policy Approval Authority Board”. The Policy Approval Authority Board is nominated by the foundation’s board or directors and serves as the policy approval and enforcement entity for a specific domain within the OISTE RootKey. The Policy Approval Authority Board is represented by members of the network of organizations using OISTE RootKey to secure their Certifications Authorities (“CAs”) and create interoperability between other PKI Domains and CAs external to the network. This policy represents Medium Assurance and Medium-Hardware Assurance Levels for public key digital certificates to ensure that the participating relying party can be certain of the identity binding between the public key and the individual whose subject name is cited in the certificate. In addition, it also reflects how well the relying party can be certain that the individual whose subject name is cited in the certificate is controlling the use of the private key that corresponds to the public key in the certificate, and how securely the system which was used to produce the certificate and (if appropriate) deliver the private key to the subscriber performs its task. This OISTE Policy Approval Authority Board is consistent with the Internet Engineering Task Force (IETF) Public Key Infrastructure X.509 (IETF PKIX) RFC 3647, Certificate Policy and Certification Practices Statement Framework. The Policy Approval Authority Board does not have any involvement in the appointment of members of the OISTE foundation’s board of directors. Pedro Fuentes, a member of the Policy Approval Authority Board is a related party of the Company because he is a member of senior management of the Company.

 

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In 2001, OISTE granted us a perpetual license to exclusively use the cryptographic rootkey and develop technologies and processes based on OISTE's trust model. The perpetual license agreement can only be terminated under limited circumstances, including if we were to move from the trust model developed by OISTE and/or changing the location of the Root of Trust from Switzerland to another country. We have to pay royalties to OISTE for the use of the cryptographic rootkey on the basis of the number of certificates issued to end users. Certain annual minimum payments apply.

 

The Collaboration Agreement signed between the OISTE and WISeKey SA on June 20, 2018 provides that:

 

a.WISeKey shall be the preferred service provider of OISTE for the fulfilment of the OISTE objectives. WISeKey shall benefit from the right to commercially exploit the Root Cryptographic Key Pairs and the associated Root Certification Authorities held by OISTE, subject to the terms and conditions set forth in the Collaboration Agreement.

 

b.WISeKey is the technical manager of the OISTE foundation for Global Cryptographic ROOTS Key, the global certification authorities as well as the digital certificates for people, servers and objects as well as the storage of the four Global Cryptographic ROOTS Key in WISeKey's Data Centre Bunker.

 

Those professional services and storage facilities are against a payment of a fee specified in the Collaboration Agreement dated June 20, 2018.

 

c.WISeKey is appointed as operator with an exclusive for the duration of this Collaboration Agreement.

 

d.WISeKey is granted a non-sublicensable worldwide license to commercially exploit the Root Cryptographic Key Pair(s) by providing certification services in conformity with the OISTE objectives.

 

e.OISTE is entitled to the following yearly fees (excl taxes):

 

i.Management Fee: CHF 120,000 in 4 equal instalments of CHF 30'000, due and payable at the beginning of each quarter.

 

ii.License Fee: CHF 96,000 in 4 equal instalments of CHF 24'000, due and payable at the beginning of each quarter.

 

iii.Royalty Fee: a certain percentage (the “Percentage”) of any certificate fees collected by WISeKey for the issuance of certificates to end users (the “Certificate Fees”) on any given year since the signature of this collaboration agreement (each, a “Contract Year”). The Percentage shall be 2.50%, to be reduced by 0.25% for each tranche of Certificate Fees of CHF 1'000'000 in any given Contract Year, until it reaches 1.50%;

 

1.CHF 1'000'000 at 2.50% = CHF 25'000.00

 

2.CHF 2'000'000 at 2.25% = CHF 45'000.00

 

3.CHF 3'000'000 at 2.00% = CHF 60'000.00

 

4.CHF 4'000'000 at 1.75% = CHF 70'000.00

 

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5.CHF 5'000'000 at 1.50% = CHF 75'000.00

 

In the years ended December 31, 2020, December 31, 2019 and December 31, 2018, OISTE invoiced WISeKey respectively CHF 351,125 (USD 374,300), CHF 217,923 (USD 219,332) and CHF 216,000 (USD 221,000).

 

In 2020 and 2019, WISeKey charged OISTE fees of, respectively, CHF 39,918 (USD 42,552) and CHF 138,610 (USD 139,506) for the facilities and personnel hosted by WISeKey SA on behalf of OISTE. During the year ended December 31, 2018, WISeKey waived the fees for these hosting services.

 

Indemnification Agreements

 

We intend to enter into indemnification agreements with our directors and executive officers. The indemnification agreements and our Articles require us to indemnify our directors and executive officers to the fullest extent permitted by law.

 

Related-Party Transactions Policy

 

Swiss law does not have a specific provision regarding conflicts of interest. However, the Swiss Code of Obligations (“CO”) contains a provision that requires our directors and executive management to safeguard the company's interests and imposes a duty of loyalty and duty of care on our directors and executive management. This rule is generally understood to disqualify directors and executive management from participation in decisions that directly affect them. Our directors and executive officers are personally liable to us for breach of these provisions. In addition, Swiss law contains provisions under which directors and all persons engaged in the company's management are liable to the company, each shareholder and the company's creditors for damages caused by an intentional or negligent violation of their duties. Furthermore, Swiss law contains a provision under which payments made to any of the company's shareholders or directors or any person associated with any such shareholder or director, other than payments made at arm's length, must be repaid to the company if such shareholder, director or associated person acted in bad faith.

 

C.Interests of experts and counsel

 

Not applicable.

 

Item 8.Financial Information

 

A.Consolidated Financial Statements and Other Financial Information

 

For a list of all financial statements filed as part of the annual report, see "Item 17. Financial Statements". For information on our dividend policy, see "Item 10B. Memorandum and Articles of Association".

 

Legal Proceedings

 

We are not aware of any legal or arbitration proceedings against our company or any of its affiliates.

 

B.Significant Changes

 

For information on any significant changes that may have occurred since the date of our annual financial statements, see "Item 5. Operating and Financial Review and Prospects” and Note 40 of our consolidated financial statements as at December 31, 2020. 

 

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Item 9.The Listing

 

A.Listing Details

 

A discussion of the offering and listing details can be found under “Markets” below.

 

B.Plan of Distribution

 

Not applicable.

 

C.Markets

 

Our Class B Shares have been trading under the symbol "WIHN" on the SIX since March 2016. Our ADSs were quoted on the OTCQX under the symbol "WIKYY" from May 2018 until December 2018 and have been traded on the NASDAQ Capital Market since December 2019 under the symbol "WKEY."

 

Our Class B Shares, par value CHF 0.05 per share issued and outstanding, have been trading under the symbol "WIHN" on the SIX since March 2016. Our ADSs were quoted on the Over-the-Counter market under the symbol "WIKYY" from May 2018 until December 2018 and have been traded on the NASDAQ Capital Market since December 2019 under the symbol "WKEY."

 

On April 15, 2021 the closing price of our Class B Shares on the SIX was CHF 1.825 per ordinary share and the closing price of the ADS on the NASDAQ Capital Market was USD 9.36 per ADS.

 

D.Selling Shareholders

 

Not applicable.

 

E.Dilution

 

Not applicable.

 

F.Expenses of the Issue

 

Not applicable.

 

Item 10.Additional Information

 

A.Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

 

Our Articles of Association provide that each share, irrespective of its par value and its class, has one vote. Economically, the Class A Shares and the Class B Shares are pari passu in all respects to each other, including in the entitlement to dividends, in the liquidation proceeds in the case of our liquidation and to preemptive rights.

 

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Class A Shares have a par value (CHF 0.01 per share) that is five times lower than the par value of Class B Shares (CHF 0.05 per share). While dividends and other distributions are made proportionally to the par value of the respective shares, each Class A Share and each Class B Share carries one vote at a general meeting of shareholders, irrespective of the difference in par value of Class A Shares and Class B Shares.

 

Approval of matters at general meetings of shareholders requires a majority of the shares present on the basis of one vote per share (each Class A Share and each Class B Shares having one vote) except that certain matters require approval by a majority of the par value of the shares represented at the general meeting (each Class A Share having a par value of CHF 0.01 per share and each Class B Share having a par value of CHF 0.05 per share).

 

Class A Shares

 

The Class A Shares are registered shares with a par value of CHF 0.01 each. The Class A Shares are fully paid-up. The Class A Shares have been issued in uncertificated form in accordance with article 973c of the Swiss Code of obligations (the “CO”) as uncertificated securities (Wertrechte), which have been entered into the main register of the SIS (SIX SIS Ltd - the Swiss securities settlement system) and constitute intermediated securities within the meaning of the Federal Act on Securities held with an Intermediary of October 3, 2008, as amended (the “FISA”) (Bucheffektengesetz). In accordance with article 973c of the CO, we maintain a register of uncertificated securities (Wertrechtebuch).

 

Each of the holders of our Class A Shares has signed a shareholder agreement with the Company pursuant to the terms of which the holder of the Class A Shares undertakes (i) not to create or permit the creation of any encumbrances over the Class A Shares, and (ii) not to transfer the Class A Shares except to a “permitted transferee” (which is defined to include certain family members and affiliates) of the shareholder who in turn agree to be bound by the shareholder agreement or to sign a new shareholder agreement with the Company. In addition, the holder of the Class A shares has the right to request the Company to convert the Class A Shares into Class B Shares (by putting the requested conversion on the agenda of the next annual meeting of the Company’s shareholders). The conversion of Class A shares into Class B shares is subject to approval by the Company’s shareholders holding Class A Shares and Class B Shares. The holders of Class A shares who have signed the shareholder agreement have undertaken to vote in favor of requests for conversions of Class A Shares into Class B Shares. Upon conversion, each five (5) Class A Shares are converted into one (1) Class B Share. Once Class A Shares are converted into Class B Shares, the Class B Shares are no longer subject to the restrictions of the shareholder agreement and may be transferred on the same terms as other Class B Shares.

 

Class B Shares

 

The Class B Shares are registered shares with a par value of CHF 0.05 each. The Class B Shares are fully paid-up. Except for 88,370 Class B Shares, which have been issued in certificated form and not been dematerialized hereof, the Class B Shares have been issued in uncertificated form in accordance with article 973c of the CO as uncertificated securities (Wertrechte), which have been entered into the main register of the SIS and constitute intermediated securities within the meaning of the FISA. In accordance with article 973c of the CO, we maintain a register of uncertificated securities (Wertrechtebuch).

 

So long as our shares constitute intermediated securities within the meaning of the FISA, the person deemed to be the holder of any share will be the person holding such share in a securities account in his, her or its own name or, in the case of intermediaries, the intermediary holding such share in a securities account that is in his, her or its name. No share certificates will be issued, and share certificates will not be available for individual physical delivery. A shareholder may, however, at any time request us to deliver an attestation of the number of shares held by him, her or it, as reflected in the share register.

 

So long as our shares constitute intermediated securities within the meaning of the FISA, shares may be transferred by crediting the relevant transferred shares to a securities account of the transferee or as otherwise permitted under applicable law. Class B Shares traded on the SIX will settle and clear through SIS.

 

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Ordinary Capital Increase, Authorized Share Capital and Conditional Share Capital

 

Under Swiss law, we may increase our share capital (Aktienkapital) with a resolution of the general meeting of shareholders (ordinary capital increase) that must be carried out by the board of directors within three months in order to become effective. Under our Articles of Association (the "Articles"), in the case of subscription and increase against payment of contributions in cash, when shareholders' statutory pre-emptive rights are safeguarded, a resolution passed by an absolute majority of the votes represented at the general meeting of shareholders is required. In the case of subscription and increase against contributions in kind or to fund acquisitions in kind, when shareholders' statutory pre-emptive rights are withdrawn or where transformation of reserves into share capital is involved, a resolution passed by two-thirds of the shares represented at a general meeting of shareholders and the absolute majority of the par value of the shares represented is required.

 

Furthermore, under the Swiss Code of Obligations (the "CO"), our shareholders, by a resolution passed by two-thirds of the shares present or represented at a general meeting of shareholders and the absolute majority of the par value of the shares present or represented, may authorize our board of directors to issue shares of a specific aggregate par value up to a maximum of 50% of the share capital registered in the commercial register in the form of:

 

·conditional share capital (bedingtes Aktienkapital) for the purpose of issuing shares in connection with, among other things, (1) option and conversion rights granted in connection with warrants and convertible bonds of ours or one of our subsidiaries or (2) grants of rights to employees, members of our board of directors or consultants or our subsidiaries to subscribe for new shares (conversion or option rights); or

 

·authorized share capital (genehmigtes Kapital) to be utilized by our board of directors within a period determined by the shareholders but not exceeding two years from the date of the shareholder approval.

 

Pre-emptive Rights

 

Pursuant to the CO, shareholders have pre-emptive rights (Bezugsrechte) to subscribe for new issuances of shares in proportion to the respective par values of their holdings. With respect to conditional capital in connection with the issuance of conversion rights, convertible bonds or similar debt instruments, shareholders have advance subscription rights (Vorwegzeichnungsrechte) for the subscription of conversion rights, convertible bonds or similar debt instruments in proportion to the respective par values of their holdings.

 

A resolution passed at a general meeting of shareholders by two-thirds of the shares represented and the absolute majority of the par value of the shares represented may authorize our board of directors to withdraw or limit pre-emptive rights or advance subscription rights in certain circumstances for valid reasons.

 

If pre-emptive rights are granted, but not exercised, our board of directors may allocate the pre-emptive rights as it elects, subject to the particulars of the relevant shareholders' resolution or board resolution.

 

With respect to our authorized share capital, our board of directors is authorized by our Articles to withdraw or to limit the pre-emptive rights of shareholders, and to allocate them to third parties or to us, in the event that the newly issued shares are used for the purpose of:

 

·issuing new shares if the issue price of the new shares is determined by reference to the market price;

 

·the acquisition of an enterprise, parts of an enterprise or participations or for new investment projects or for purposes of financing or refinancing any such transactions;

 

·broadening the shareholder constituency in certain financial or investor markets or in connection with the listing of new shares on domestic or foreign stock exchanges;

 

·national and international offerings of shares for the purpose of increasing the free float or to meet applicable listing requirements;

 

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