WISeKey International Holding Ltd

Greetings, ladies and gentlemen, and welcome to the WiseKey International First Half 2023 Financial Results Earnings Conference Call. As a reminder, this conference call contains forward-looking statements. Such statements involve certain known and unknown risks, uncertainties, and other factors which could cause the actual results, financial condition, performance, or achievements of WiseKey International Holdings Limited to be materially different from any future results performance, or achievements expressed or implied by such forward-looking statements. WiseKey International Holdings Limited 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 a listen-only mode. The 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 Morera, founder and chief executive officer of WiseKey.

Thank you very much, and good afternoon to all of you joining us from Europe and the United States. I am joined today by our chief financial officer, Peter Ward, And now let's start this call by providing a brief highlights on the company performance and activity for the first half of 2023. Then Peter will provide commentary and or a financial condition in great details. And before opening the floor to Q&A, I will discuss growth opportunities for the second half of the year and beyond. So in the first half of the year, we continue on the same path we established in 2022. As you remember, in 2022, we made the strategic decision to operate YSK as a holding company on several distinct operational companies covering the full spectrum of YSK-related technology. Currently, the holding company, which is, as you know, listed in Switzerland and with ADR program in the United States, comprises of the following subsidiaries. So we have YSK Semiconductor that was established launched as a CLSQ listed in the NASDAQ from May this year, which is a company that designs semiconductors, a new generation of post-quantum technology, which is a company that has big inroads now in what we call the IoT or the Internet of Things revolution. Then we have the YSKESA, which is the Geneva-based original company that is a company specialized in cybersecurity, road of trust, and public infrastructure segment. And it's actually the underground infrastructure for the rest of the companies in what concerns cybersecurity and identity management. And then we have YSAT.Space, the space technology using PicoSatellite segment that we launched a year and a half ago. And then obviously YSART, which is the blockchain NFT segment that was also launched a year and a half ago. So each of these subsidiaries contribute in meaningful way to the overall mission of the WiseKey Holding Company while also operating independently with a specific focus on their particular area of research and development and expertise and integrating their respective technology into the WiseKey platform. So they are what we call the pillars of the WiseKey platform. The decision to operate as a holding company and diversify our operations were able to focus on resources in areas where we saw the most promising opportunity and diversity on specifically revenue regeneration sources. As a result, we were able to report substantially improved financial and operational results for the first half of the year. While Peter will discuss the details of these results shortly, I would like to emphasize that in the first half of 2023, as compared to the first half of 2022, we reported 39% revenue growth to $15.1 million, 69% increase in gross profit to $8.1 million, and overall improved profitability. Continuing investment in R&D for the development or post-quantum chip, next-generation semiconductor, and next-generation also of a revenue stream. If we want to zoom back into each of those verticals, and describe the progress during the first half of the year. We can then say that the main achievement has been done in the semiconductor fields, where CLSQ managed to do a very successful listing on the NASDAQ the 24th of May this year, reaching an important valuation at that time of $200 million. We also distributed 10% of the ownership of YSK into SEAL, to YSK shareholders, and as a consequence, we diversify the number of investors than there are currently investors in CL. CLSQ has been very focused in obtaining the right accreditations required to sell the technology in the United States. Fifty percent of the revenues of CLSQ are now American companies, and they are buying their products and services, as I had the opportunity to deep dive during the last investor's call on CLSQ a few days ago. And this technology continues to increase as the demand on semiconductor is exponential. By the year 2030, trillions of things will be connected to the Internet. And those things will require authentication, will require secure elements, which are the microchips that you insert at the product level, and will require encryption. So the data that is sent from the semiconductor to the cloud is totally encrypted. This is also generating a new revenue model for us. As for the moment, we are selling the chips, the semiconductors. But in the future, we'll be able also to monetize the data. So, WiseKey has, in cooperation with CLSQ, entered into a strategic partnership. So, we have several important partnerships on where this data that is collected from the objects will be analyzed and will be made available back again to the clients. as a way to increase what we call the recurrent revenue model of Wise Ski Semiconductor CLSQ. The other area which is important on CLSQ is the accreditation process. So we have been accredited in several important standard organizations, such as the MATER certification process, which is a certification that is allowing companies with matter certificates to sell into the United States semiconductors, and they are used to secure objects, what we call devices, and they are installed at home, like your thermostat, like your Wi-Fi system, like your smart counter. All this information that is selected and is sent from the chip to the cloud is encrypted, and this certification of matter ensures that whatever you put in your house, in your home, it has the high level of security and authentication to avoid the possibility of a hacker to intrude your infrastructure and collect data or personal information from the end users. The certification of SEAL is based on the PKI public infrastructure, which is one of the, I will call the, uh, original assets of the entire group. You know, wise key is considered one of the 10 top root of trust. Those are, um, uh, encryption layers than they are required into browsers, operating system, iOS, and many other, um, device control, uh, technology that is already embedded into existing operating system and browsers. So this penetration, uh, over the last 25 years has allowed us to be basically everywhere. And this is where it accelerates the deployment of the chips, as when we connect chips to the internet, the other side of the connection requires knowledge about the connecting part, and for that you need a root of trust. The PKI segment is also the segment that provides digital identification to those devices. So as we are connecting millions, billions of devices, 1.5 billion microchips have been sold already by the company historically. Each of them with a digital identity creates a very powerful identity ecosystem, which is then essential to build basically authenticated data. We also look into connectivity. Connectivity is an area where we are not making revenue yet, but it has a huge potential. More objects you are going to be able to connect, more transactions are you going to be able to generate, and more connectivity you need for those devices. And the current connectivity, is very limited. We only have connectivity into rural cities, but not rural areas, not connectivity in the middle of the sea, not connectivity in many developing countries, in many areas. Only 10% of the world is connected currently, and 90% is not yet connected. So we created another subsidiary with the name YSAT. This YSAT has made a huge amount of progress in the last six months, Not only we launched 17 satellites in cooperation with FOSA, which is one of the startups we invested, but we also caught a deal with SpaceX as a launcher. Those satellites have been launched with SpaceX. And we have now 17 operational satellites, which are being used for many new applications, like smart container initiative, which we signed with BBA Labs that allows us basically the trustability of containers in the middle of the sea and being able to ensure the transport company that the containers are not being lost or replaced or any potential hacking on the container itself. We have done a partnership with the Swiss Army on which we are currently in advance development process of providing IoT connectivity from the space on military hardware. We also have done a partnership with Parrot, which is one of the leading drone companies now using or microchips that they are allowing Parrot to control the behavior of the drones, but now also being able to use our satellite as a way to connect to the drones. We've also been entering into a very powerful partnership with PLD Space, which is a European company launching their own rockets. So this is in Europe and anywhere in the world, by the way. Private rockets are not really available, only SpaceX and a few others, and there is going to be a huge need of decentralization of sending the satellite to space. So we are looking for new launchers, and we have done a relation with PLD Space with a rocket which will be launched from Spain in 2024 with the name Miura. And this rocket will transport the next generation of YSATs, YSAT is also developing applications that allow to encrypt data from the space using our post-quantum capabilities. So imagine the future secure communications from the space. So it looks maybe complicated for traditional investors to understand so many areas of interactions, but if you really look at why it's key, we act as a platform. We want to position ourselves as a multi-use platform. where different activities required for the fourth industrial revolution are slowly being added to the platform. Semiconductors, root of trust, PKI, space, micro satellite, Pico satellite technology, and others are essential to ensure that the company will have its, will keep its edge of innovation. and will be relevant for the years to come as we are competing against very powerful companies. And all of them are trying to become market leaders on this technology, as it was demonstrated a few weeks ago by the IPO of Arm and a few other companies. And they are reaching the market now with the maturity required to do this kind of platform effect. So, Wysky is one of those assets. We are obviously smaller, but we are a mid-cap that has a very strong DNA in cybersecurity, which is pretty unique. and a very strong experience in providing complex processes and projects, and with our technology being able to solve them. And then we have WiseArt. So WiseArt is the blockchain strategy of the company. For us, blockchain is an essential way of decentralizing data, as blockchain is less energy consuming than centralized data centers, so it is totally sustainable. in the way that blockchain technology is decentralized. You don't need to maintain huge data centers and burn a lot of energy. So it's part of our ESG strategy to decentralize data in a way that is easy to access and reduces the dependencies of massive data centers that so far have been used as a way to centralize data. WiseArt is a marketplace. So it's a marketplace and it started very small, only with few NFTs. This has become a major marketplace for art. It is a marketplace that has now something like $45 million in art being enclosed inside the marketplace, growing towards $100 million by the end of 2024. And it's a company that is actually very innovative in the way they are using the platform. I mean, we are competing against very big platforms such as OpenSea with huge valuations. Wise Art is actually doing a very unique penetration into the humanitarian world by doing very successful NFTs that they are used as a way to finance charity organizations such as the Red Cross in Switzerland or the United Nations. and many others, and we have been able to close very interesting transactions where organizations that they are teaming with us are able to raise hundreds of thousands of dollars in each of those transactions. The revenue model of WiseArt is to collect a fee for every transaction generated by the platform, which is the standard in this market. It goes between 5% and 15%. of the price transacted by the platform. So obviously our intention there is to aggregate more NFTs, not only NFTs, but also original. So we have original paintings. It's becoming like Amazon of art on where users are slowly using the platform to reach out investors and buyers of the other art. As I mentioned before, these verticals and YSK contribute to the, in a very meaningful way, to the overall mission of the YSK holding company, which is actually for first time maybe in the last year operating truly as a holding company. So in cases like CLSQ, after reaching the right maturity in terms of revenue, and penetration in the market, we decided to list on the NASDAQ with a very successful listing. But it is also our intention to provide the same type of exit strategies to each of the operational entities, and they are independently with a specific focus on R&D, incrementing the value of the WiseKey platform. Weisky, maybe just touching a few words on the stock situation. We are facing a situation which I will say is not only us, is the conditions of the market. Mid-cap and micro-cap market have been really damaged by the current crisis. Concentration of funds is on the big companies. Many of the funds that normally finance and buy shares on these type of companies are having their own problems with inflation and the lack of liquidity. And this has been aggravated by all the things related, obviously, to the fact that there are several moving parts and they are slowly structuring. And sometimes the valuation of Wisekey was not able to reflect the valuation of the group, a very concrete case. When we listed CLSQ for $200 million and WiseKey was 90% owner of CLSQ, this did not transform the WiseKey sweet shares at that value. The WiseKey shares at that value didn't move. despite the fact that Wysky owns 90% of another listed company that is listed on the NASDAQ. We expect the situation to improve due to the fact that the company has a strong cash position, which Peter is going to mention in a few minutes. but also by the fact that we are reducing substantially our burn rate, which is still sometimes there is confusion about the losses of the company when we talk about losses. It's actually the fact that we are financing three startups together with one listed company, then they are all of them reaching a level of maturity. So obviously it is an ambitious process, but it is an essential one as there's absolutely no other way to reach maturity in YSK if we don't push this platform effect. And in order to have this platform effect, we need to have the subsidiaries and they are each of them developing technologies to reinforce that platform. So we believe that we will be in much better shape as we move forward and we thank the shareholders and backers of YSK to support the company to this point. So I now turn the call to Peter, who will discuss the highlights of the 2023 result, and then I will be giving my closing remarks after Peter. Please, Peter, go ahead.

Thanks, Carlos. As Carlos mentioned earlier, for the first half of 2023, we reported substantially improved financial performance for Wysky. Specifically, wisely revenue for the first half 2023 was 15.1 million dollars compared to 10.8 million in the first half of 2022 which was that represents a 39 percent increase year on year this 39 increase in revenue is mostly attributable to our semiconductors vertical on the clsq which reported first half 2023 revenue of 14.8 million compared to $10.7 million in first half of 2022. This is due to the higher demand for semiconductors, following shortages in the industry triggered by the COVID pandemic over the past few years. Our operations are global in scope, and we generate revenue from selling our products and services across various regions. Our operations in North America now contribute 55% of total revenues, the largest part of our revenues. whilst our European market remains a strong contributor with 32% of our revenue. Our focus remains on these two regions, and we continue building our sales and marketing team in these areas. In the first half of 2023, we also recruited an additional sales member in Taiwan with the objective of increasing our presence in Asia, as evidenced by the recently announced distribution agreement with Holy Stone, a Taiwanese semiconductor distributor. We also have significant activities in Japan to expand our presence there. In 2022, we started the implementation of a significant investment plan to increase the semiconductor production capacity in response to customers' expectations. We anticipate that this will support a year-on-year increase in net sales for Wysky of over 20%, and we expect a strong second half. although not reaching the level of the first half of 2023. Our customers are initiating their transition towards our new product generation, which will bring them to tighten controls over their inventory and order processing. Moving on to our gross margin, the 39% increase year-on-year increase in revenue and our ability to update our pricing strategy to absorb the higher purchase costs caused by the shortage in semiconductor positively impacted our gross profit, which increased by 69 percent in the first half of this year versus the same period of last year, and the gross margin, which increased by over 9 percentage points from 44 percent to 53.6 percent. Our operating loss decreased by 11 percent from 6.6 million in the first half of 2022 to 5.9 million in the first half of 2023. despite one-off listing related expenses of $400,000 incurred in the first half of 2023, and expenses in relation to the newly created board and management services following the listing of CLSQ on the NASDAQ. We expect that our operating expenses will increase in future periods as our strategy includes the strengthening of our sales and marketing team to expand our customer base both through new industries and geographically, Investment in our satellite-operated technology on the launch of additional YSAT Pico satellites to increase coverage and strengthen our offer of authentication solutions anywhere in the world, even in low-connectivity areas. Our R&D investment in relation to the Quasars project for the Next Generation Post-Quantum Semiconductors, TMP. That said, our net loss from continuing operations increased from 6.6 million in the first half of 2022 to $7.1 million for the first half of 2023, as mainly due to the SEAL SQ listing expenses, as well as the additional investment in technology and capital expansion mentioned above. As disclosed, in the first half of 2023, we reported a net loss of $7.1 million, as compared to a net income of $800,000 in the first half of 2022, which is mainly due to the $11.8 million gain on the disposal of the ROG of GmbH disclosed for the six months ending June 30th, 2022. However, the receivable for the sale of Arago GmbH was fully written off as of December 31, 2022, which transformed the gain on disposal as of June 30, 2022, into a loss on disposal of December 31, 2022. Taking into account the write-off for the sale of Arago, The net loss of $7.1 million in the first half of 2023 compares well to a net loss of $26.1 million in the first half of 2022. I would like to note that with the sale of this company, we have significantly reduced our cash burn rate and fixed costs. Our cash and cash equivalents at June 30th, 2023 were $14.1 million compared to $20.7 million at December 31st, 2023. Most significant sources of funding for the group are financing facilities, customer sales, and research tax credits provided by the French government. I'm now turning the line back to Carlos, who will discuss the second half of 2023 visibility and key growth areas going forward. Thank you, Peter.