WISeKey International Holding Ltd

Welcome to Wise Key International Full Year 2021 Financial Research Earnings Call. As a reminder, this conference call contains a forward-looking statement. Such statements involve certain known and unknown risks, uncertainties, and other factors which could cause actual results, financial condition, performance, or achievements of Wise Key International Holding LTD to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statement. Wise Key International Holding is providing this communication as of this date and does not undertake to update any forward-looking statements contained herein as a result of new information, future events, or otherwise. At this time, all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Carlos Morella, founder and chief executive officer of WiseKey. Thank you. You may begin.

Thank you very much, and good afternoon to all of you joining Front Europe, and good morning from the United States. So just to mention that last year, 2021, was a very transformative year for Wysky. As you recall, the entire industry, the semiconductor industry, has been disrupted during the COVID situation as all the supply chain logistics was paralyzed in many countries. And we do source our microchips from Asia, from Taiwan in particular, and Thailand. And we had, obviously, the situation where many of our clients were not able to deliver them due to the shortage. But this is being recovered. Despite that situation, we managed to deliver a $22.3 million in revenue, which compares about 2020 with a 51% growth in the company. We could have even delivered more. We have about $5 to $7 million that was not able to be cashed in due to the fact that we could not deliver the client. But the good news is that we managed to recover that in 2022. Just as I recall, the audience, WiseKey operates now three verticals. One is the traditional vertical, which is our security. We have 23 years' experience in running cybersecurity projects. That includes identity management with our own cryptographic root key, which is a dominant one. Something like 5 billion devices have now the WiseKey cryptographic root key embedded. Those are browsers, operating systems, some documentation tracking devices, everything which basically dematerializes can be embedded with the root key of WiseKey. This root key is at the same level of companies like Symantec, VeriSign, and others. Then we have the other vertical, which is IoT. It's a very fast-growing vertical. This is where our main revenue generation comes from, which is the possibility of embedding semiconductors into devices, devices as laptops, smartphones, routers, modems, drones, gaming consoles, have a necessity to be secured by those chips. In the United States, we have a very powerful demand for those chips now as more things are getting connected to the internet. And if you don't secure the object with that technology, the object becomes a threat. It means that hackers can hack unsecured objects and through that object get into the infrastructure. So new sectors emerging with revenue in in 2021 and increasing 20 times in 22 are from the health sector we managed to enter into this sector which is now realizing the danger of not securing the objects imagine a pump insulin being hacked in a hospital or a scanners or life supporting equipment being hacked by the hackers and and basically stop to function that basically has, you know, death and life consequences. So liabilities or insurance companies are now requesting that this technology is available in the product even before they're covering the insurance part of the product. In that area, WiseKey is very big. We have 1.6 billion secured chips already embedded in high-tech products. And those chips are slowly being connected to the internet. Not all of them, they are connected to the internet. Many of those devices are not yet connected to the internet, but the manufacturers are all of them moving towards connecting devices to the internet because this is the best way to monitor the performance of device, the security of device, the monitoring system of the device. And this is an area which is growing very fast. Actually, on that specific area in 2022, WiseKey has seen very strong demand from main clients in the United States. Then they are increasing their request for microprocessor over 170% of the previous request. So for us, obviously, being in the United States this year is going to be a major priority, and the company is working towards that. The company has also a very strong year in what we call the combination of cybersecurity, IoT, and NFTs, although some people have concerns about the NFT expansion. Actually, our stock was influenced by Mimi Socks, you know, because when we announced the NFT last year, our stock progressed enormously. and then decrease it because there was a high speculation in the market, especially on investors, on NFT companies. But we are not the traditional NFT company that just put an NFT on a marketplace. We are the security company that NFT plays use in order to ensure that the objects are not hackable, cannot be replaced or stolen from platforms. In the last weeks, they have been Anonymous and very large platforms trading at $10 billion and they are losing NFTs and they are getting hacked in the case of wise key. We ensure as a cybersecurity company than those NFTs and we are now publishing and selling in a platform with the name wise dot art are secure because they include or cybersecurity or identity managing and in some cases. like the case of bringing physical art to the metaverse, we're also now able to digitally tag the original. Actually, yesterday, just as an information, Waisky launched a NFT with a Spanish museum that they NFT with our technology, a very famous letter from Christophe Colomb when they discovered America. And that letter was valued by Christy $400 million. And they wanted to create an NFT of that letter. And obviously, they want to be sure that the technology they will use will be a technology that will not be possible to hack or replicate. There's a lot of fake copies on NFT. So Wysky entering to the NFT will allow objects to connect directly to the blockchain and being able to mint directly from the original. So imagine a painting that will have a microchip of Wysky installed. That painting will immediately establish a NFT minting process in our WISE.R platform. And with that, that object can be immediately on sale through what basically we call the digital twin of the object. This obviously accelerates also the deployment of microchips because more NFTs you're going to be able to load into the platform, more chips you are going to be selling, more identities are going to be collected. And WiseKey also through the NFT vertical is able to generate a different revenue model than just selling a technology, microchips or cybersecurity as we are getting 20% of the value of every NFT sold in our platform. And we return 80% to the artist or the museum or whoever has the ownership. This sector is also evolving in other areas. We are seeing now NFTs for industrial properties, intellectual property, real estate, luxury watches. So the NFT is actually becoming dominant and we believe that we are entering into the fourth industrial revolution. we are entering into the NFT of everything and where every single object will have an NFT minted on the blockchain because that's the best way to certify and verify that the object is actually a genuine object. We're also looking into the possibility of using NFT technology for identity management. This is very unique. Today, Elon Musk has announced and Twitter wants to be the platform that will verify and authenticate everybody on earth. That's a huge consequences for neutrality and ownership of your identity. You don't want a platform to do that. So the model of WISC is much more human centric, is that you want your identity, you want the control of that identity. And with that identity, if you create an NFT with that identity in the blockchain, everybody, anyone can verify that identity without the need of you compromising the ownership of that identity with a platform. So, as I mentioned before, the company is still investing, although we announced an EBITDA loss of $20.7 million. A lot of that loss, US GAAP accounted loss, is actually investment we made in areas such as artificial intelligence and also in areas such as PicoSatellites, a wide-scale launch. We invested last year, but we launched this year, generally this year, Or on satellites, we have now 12 satellites in Arvid, and we're going to have 88 before the end of the year. We are launching satellites again in June. And those PICO satellites are IoT satellite tracking devices. So basically what they do, front of space, they are able to track the identity that is stored in the microchip, either directly from the object, which could be a an agricultural object, imagine a tree, then you want to track, or a vineyard, then you want to track humidity, temperature, whether there has been some damage. All that traceability comes from the space. Those Pico satellites collect the signal of the identity of the object and sends that information to control centers, then they can use that information to assess. So this is being used now in areas such as controlling pipelines in case the pipeline breaks. In the distance of the pipeline, that signal is captured by the satellite. Those satellites were launched with SpaceX So that make it possible to launch the satellite because much cheaper obviously those satellites a few years ago would cost you $100 million maybe to send five satellites. Now it costs $200,000 per satellite and the price is going down. We have many clients and they're approaching us to say, hey, can we add into the WISE, we call that WISE-SAT, constellation of satellites means that they will be able to use the satellite for their need while they share the connectivity with our needs as well. So this becomes like a collective approach to use those satellites. We expect that to become a major growth area to WiseKey. We have invested a lot on R&D. We have developed new chips like the Volt IC 292, which increases the security, and the Volt IC 408, which is a new FIPS compliant 143 level 3, which is the highest level on certification. Those very high-end chips are used for critical missions like drones. WiseKey provides the chips for, for instance, a drone manufacturer with a very strong presence in Europe and the United States with the name Parrot. This drone manufacturer actually sells the drones to the U.S. military and also to the French military, and they require that kind of chip in order to ensure that the security of the drones are maximized and nobody can hack We are also investing. We did a lot of investment last year, but especially this year in what we call post-quantum cryptography, that they are resistant against quantum crypto analysis because quantum is coming. We are in three years in a quantum era, and we need to anticipate the future of cybersecurity threats. So working in cooperation with the American National Institute of Standards and Technology and the European Union Agency for Cybersecurity, we are now in the process of generating our own post-quantum chips. that will be a chip that will have a much higher resilience than the current one. As you know, the cyber war going on now between Russia and the rest of the world is a high concern because the critical infrastructures are being threatened now. This is not only hacking your data, this is hacking a hospital, hacking the electrical grid, and we need to secure the objects. I mean, there is absolutely no way to secure an infrastructure by software only. You have to go object by object, put the chips on the object, make sure that the identity of the chips are not able to be compromised. And this is the area where WiseKey is making an important development. We also invested into an AI company with the name Arago. That part of the investment was done to integrate the Arago AI capability into the IoT capability. Arago does many things, including including automation, which were less interesting for Wyski because that diversifies too much our offering. So what we basically focused was to integrate the hero, H-I-R-O, which is a human interface AI algorithm into the IoT backend of Wyski, which we call that I-N-E-S, which is the software that runs all the IoT operations. And the reason why is because we generate a lot of data And this data has potential value when you analyze that data through AI as you can detect vulnerability issues. You can also anticipate threats. You can also provide data analysis and provide a much better support to our clients. So we developed a joint product with the name Wise AI. Wise, by the way, means World Internet Security. And this AI, it's been now fully integrated. We just announced, and I give that as all of that happened just recently, we just announced that WiseKey is selling the 51% of Arago uh we didn't want to own the entire company and we rather provide the cash that we got from from the sale to reinforce or semiconductor iot nft play which we believe is unique in the market and we believe is the one that will allow the company to uh to grow much faster and and and better we are disappointed and i make that point because obviously i got several calls with the current valuation of wise in the stock market i mean it makes absolutely no sense uh wise key has nearly more cash in evaluation And there are many factors for that. Many of them, you know them already because this is the entire sector suffering that. The EV, the enterprise value is nearly nil for companies, mid-cap companies. We expect this to be corrected very soon, hopefully once the war is over. We also had two years of COVID in the middle that obviously put a lot of pressure on the stock. And we have made acquisitions and those acquisitions, part of that has been done with shares. So all that has created an overhang on the stock, which has decreased tremendously. But companies like Wisekish will be trading at six times revenue. We are trading at one time revenue. So you see the potential upside there. And we are trying to correct that and we will be providing very concrete actions in the next weeks before General Assembly. So we will present to the shareholders a plan of recovering the devaluation of YSK and present a very powerful three years to five years plan where you can see YSK becoming a major leader in the areas that I just mentioned. So without taking any longer of your time, I would like to pass the call to Peter Ward, our CFO, who will provide details on the 2021 financial result. Peter, please go ahead.

Okay, thank you very much, Carlos. Yes, I will give you some more information on the financials that we've performed. As you can see, 2021 was a very positive year for Wysky, with revenues growing by, as Carlos mentioned, 51%. from 2020 to reach $22.3 million in 2021, and finishing with a very strong liquidity position with a total cash balance of $34.4 million at year end. The cash and cash equivalents together with the restricted cash of December 31, 2021 was $34.4 million compared to $21.8 million in 2020. This reflects the group's continued drive to maximize cash reserves and ensure that it has sufficient liquidity to be able to support its operations and investment strategy, such as its investment in Arago and the development of its WiseArt NFT platform. This has also been essential for the investment in Arago in February 2021, when we acquired 51% controlling interest, as Carlos mentioned. Arago's original cost structure was very heavy. and Wysky's management has invested resources to streamline it and to resize it in line with its revenue activities. In total, Wysky invested around $7.5 million in Arago's operations in 2021. The group also entered into new funding arrangements with L1 Capital and Anson during the year and continues to have funding arrangements in place for the fund of Yorkville. As of December 31, 2021, these facilities provide the opportunity to draw down up to $5 million for L1 Capital, up to $5.5 million for Anson, and up to just over $50 million for Yorkville. So this illustrates the capacity of Wysky to find funding for its future investment and M&A strategy. Now, going back over to the revenue side, again, it was a very positive year for Wysky with revenues growing 51%. Indeed, 2021 had seen a strong decrease in demand as our customers were cautiously delaying their purchasing decisions to gauge the impact of the pandemic on their own market. This trend is now completely reversed, and we have had a very healthy backlog of customer orders since 2020, which actually exceeds our current annual production capacity. The group is making investments in its supply chain to increase its capacity for 2022 onwards in order to meet this strong demand. The acquisition of Arago in 2021 in February also contributed to the revenue increase of 4.6 million additional AI revenue. In parallel with our revenue increase, we have also showed substantial improvement in gross profit with a gross profit margin of 41% compared to 37% in 2020. Our IoT segment has been impacted by higher supply costs caused by the worldwide shortage in materials and components. However, our strong partnership with our customers has allowed us to increase our selling prices to take into account the majority of these higher supply costs. And we continue to focus on making our cost base leaner, which also contributes to the improved cost margin. Most of our revenue is generated in North America, which is why Wysky has developed its sales team in the U.S. and is still looking to strengthen its presence in this area. We're also working to develop new revenue streams with our Wysat constellation of PICO satellites. allowing for identification in remote, low connectivity areas. And our WiseArt NFT platform with built-in authentication of digital identities, which makes it one of the most secure NFT marketplaces and platforms. The group's operating loss increased by 8.2 million year on year, going from 18.5 million loss in 2020 to an operating loss of 26.7 in 2021. This is mainly due to the consolidation of Arago's results since February, with Arago's operating expenses totalling $7.2 million for the 11 months to December 2021. Although we remain attentive to reducing our cost structure, we are also committed to investing in both our sales and marketing operations to develop our sales force, and also R&D of new products such as post-quantum cryptography and development of our WiseArt NFT platform to ensure that we maintain our technology edge and respond to the evolution of the demand in our markets. We also know that we have significant non-cash expenses in 2021, such as stock-based compensation of $3.8 million and higher M&A-related expenses due to the acquisition of our 51% interest in ORAGO. For our group, being technology-driven, the level of our R&D expenses reflects our engagement to act as a leader in new cybersecurity developments and future applications. We expect our R&D expenses to remain a significant portion of our overall expenditure as the group continues to invest in new products. Our 2021 R&D expenses include these expenses related to the development of further applications for our new and existing products and technology, such as our new WiseArt NFT platform, VoltiTrust, WiseID, and NanoSeal IoT. WiseKey continues to strengthen its sales and marketing team, We recruited three new members for our US sales team in 2021 and doubled the size of our European team in comparison to 2020. These investments in sales have started to bear fruit, with a backlog of customer orders totaling $39 million at the start of 2022. Our G&A expenses increased by $8 million in 2021 compared with 2020. The increase is due to three main factors. $4.7 million additional G&A expenses from the consolidation of Arago since February. Stock-based compensation of $2.5 million recorded in G&A in comparison with only $200,000 in 2020. And an increase of $600,000 in legal and professional fees of the parent in relation to the acquisition of a controlling interest in Arago. The group made a net loss of $24.1 million in 2021 in comparison to a net loss of $28.9 million in 2020, hence a net decrease of the loss of $4.8 million. The variance was mainly due to the one-off credit of $5.6 million in non-operating income corresponding to the reclassification of the fair value adjustment on the convertible loan with Arago at acquisitions. We also note that the net loss of $7.1 million in 2021 added as a result of the consolidation of Arago was offset by a one-off $7 million impairment charge in relation to investment in Tarmin recorded in 2020. As discussed earlier, the main highlight is the liquidity reserve that the company has been able to build with a total cash balance of $34.4 million referring to the balance sheet. As far as receivables are concerned, despite the 51% increase in revenue, our day sales outstanding, DSO, which is the average number of days that it takes a company to collect the payment for the sale, has actually decreased from 64 days to 49 days in 2021. This shows the good quality of our additional sales and our ability to negotiate favorable payment terms thanks to strong customer relationships. We have also reduced our day sales of inventory from 110 days to 96 days in 2021, which shows that the revenue growth has not impacted our inventory management processes. With a long manufacturing cycle in the semiconductor industry, especially as our products are highly tailored, we expect our inventory to remain at relatively high levels with 2.7 million at the end of 2021 compared to 2.5 million at the end of 2020. Finally, on the liability side, Our total convertible notes liability was $9 million at the end of December 2021, compared to $9.3 million at the end of 2020. The convertible notes outstanding at year end 2021 related to the L1 and Anson, L1 Capital and Anson facilities, with respectively $3.1 million and $5.9 million outstanding. We also note that the deferred income tax liability of $2.9 million at the end of 2021 relates to the acquisition of our 51% interest in Arago. With the sale of Arago, this liability will disappear. So with that note, I am finalizing my presentation. I would like to return now to Carlos, or the moderator, for further questions.