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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, 2023

 

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 half a
Class B Share, par value CHF 2.50 per share

Class B Shares, par value CHF 2.50 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: 1,600,880 Class A Shares and 2,954,097 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 o

 

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. ☐

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

 

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 o Item 18 o

 

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 3
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 4
Item 1. Identity of Directors, Senior Management and Advisers 7
Item 2. Offer Statistics and Expected Timetable 7
Item 3. Key Information 7
  A. RESERVED 7
  B. Capitalization and Indebtedness 7
  C. Reasons for the Offer and Use of Proceeds 7
  D. Risk Factors 7
Item 4. Information on the Company 45
  A. History and Development of the Company 45
  B. Business Overview 46
  C. Organizational Structure 69
  D. Property, Plants, and Equipment 69
Item 4A. Unresolved Staff Comments 70
Item 5. Operating and Financial Review and Prospects 70
  A. Operating Results 70
  B. Liquidity and Capital Resources 84
  C. Research and Development, Patents and Licenses, Etc. 94
  D. Trend Information 94
  E. Critical Accounting Estimates 95
Item 6. Directors, Senior Management and Employees 96
  A. Directors and Senior Management 96
  B. Compensation 101
  C. Board Practices 103
  D. Employees 107
  E. Share Ownership 107
  F. Disclosure of a Registrant's Action to Recover Erroneously Awarded Compensation 110
Item 7. Major Shareholders and Related Party Transactions 110
  A. Major Shareholders 110
  B. Related Party Transactions 112
  C. Interests of experts and counsel 123
Item 8. Financial Information 123
  A. Consolidated Financial Statements and Other Financial Information 123
  B. Significant Changes 124
Item 9. The Listing 124
  A. Listing Details 124
  B. Plan of Distribution 124
  C. Markets 124
  D. Selling Shareholders 125
  E. Dilution 125
  F. Expenses of the Issue 125
Item 10. Additional Information 125
  A. Share Capital 125
  B. Memorandum and Articles of Association 125
  C. Material Contracts 147
  D. Exchange Controls 152
  E. Taxation 152
  F. Dividends and Paying Agents 159
  G. Statement by Experts 159
  H. Documents on Display 159
  I. Subsidiary Information 159
  J. Annual report to security holders  159
Item 11. Quantitative and Qualitative Disclosures about Market Risk 159
Item 12. Description of Securities Other than Equity Securities 160
  A. Debt Securities 160
  B. Warrants and Rights 160
  C. Other Securities 161
  D. American Depositary Shares 161
Item 13. Defaults, Dividend Arrearages and Delinquencies 163

 

i

 

 

Item 14. Material Modifications to The Rights of Security Holders and Use of Proceeds 163
Item 15. Controls and Procedures 163
Item 16. [RESERVED] 163
Item 16A. Audit Committee Financial Expert 163
Item 16B. Code of Ethics 163
Item 16C. Principal Accounting Fees and Services 163
Item 16D. Exemptions from the Listing Standards for Audit Committees 164
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 164
Item 16F. Change in Registrant's Certifying Accountant 164
Item 16G. Corporate Governance 164
Item 16H. Mine Safety Disclosure 164
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 164
Item 16J. Insider trading policies 164
Item 16K. Cybersecurity  164
Item 17. Financial Statements 167
Item 18. Financial Statements 167
Item 19. Exhibits   167
Index to Exhibits 167
SIGNATURES 171

 

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 one-half of one 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," "the WISeKey Group," "WISeKey International Holding Ltd", “WIHN”, 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" and “WIHN Class A Shares” refer to our Class A Shares, par value CHF 0.25 per share

 

·"Class B Shares" and “WIHN Class B Shares” refer to our Class B Shares, par value CHF 2.50 per share

 

·"Code” refers to the U.S. Internal revenue Code of 1986, as amended

 

·"IC” refers to integrated circuits

 

·"IoT" refers to Internet of Things

 

·“IRS” refers to the U.S. Internal Revenue Service

 

·“Jobs Act” refers to the U.S. Jumpstart Our Business Startups Act of 2012

 

·"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

 

·“SaaS” refers to Software as a Service

 

·"Sarbanes Oxley Act” refers to the U.S. Sarbanes-Oxley Act of 2002

 

·“SEC” refers to the U.S. Securities and Exchange Commission

 

·“Securities Act” refers to the U.S. Securities Act of 1933, as amended

 

·“Securities Exchange Act” and “Exchange Act” refers to the U.S. Securities and Exchange Act of 1934, as amended

 

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

 

·"Switzerland" refers to the Swiss Confederation

 

3 

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This annual report contains forward-looking statements. These forward-looking statements include information about possible or assumed future results of our operations or our performance. Some of these forward-looking statements can be identified by terms and phrases such as "anticipate," "should," "likely," "foresee," "forecast," "believe," "estimate," "expect," "intend," "continue," "could," "may," "plan," "project," "predict," "will," and similar expressions, as they relate to us, our management or third parties. Forward-looking statements include statements regarding our business strategy, financial performance, results of operations, market data, events or developments that we expect or anticipate will occur in the future, as well as any other statements which are not historical facts. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. 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;

 

·Future operating or financial results;

 

·Our planned capital expenditure program for additional production lines to be added to our supply chain;

 

·Our intention to make investments in sales and marketing operations including R&D of new products, such as post-quantum cryptography, WISe.ART, and WISeSat.Space;

 

·Our plans for global customer base expansion;

 

·Our intention to establish a Design Center, OSAT and Personalization project;

 

·Our expansion of the WISeSat.Space project;

 

·Our expectation about the development of markets for the WISeSat.Space Low

 

·Earth Orbit satellites;

 

·Our development and tokenization of WISe.ART;

 

·Our plan to evolve the WISeID platform to include Web 3.0 capabilities, such as Distributed Identity;

 

·Our timeline related to the deployment of SEALCOIN;

 

·Our anticipated pipe growth in 2024;

 

·Our belief that the products resulting from our R&D will create additional opportunities for growth;

 

·Our expectation about the development of the markets for WISeKey, including expanding the role of Metaverse, increase in cyber threats and growth of secure hardware market, growing demand for IoT solutions, increase in cybersecurity spending based on the recent regulations and legislations;

 

·Our intent to invest heavily in the ongoing development of our products and technology;

 

·Whether or not we are or will be a PFIC;

 

·Assumptions underlying or related to any of the foregoing.

 

4 

 

 

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. Those factors include, in addition to those set forth in "Item 3D. Risk Factors" and those included elsewhere in this report, among others, the following:

 

·The inability to realize estimated financial position, results of operations or cash flows;

 

·The inherent uncertainty associated with financial projections and valuation techniques;

 

·Our ability to anticipate market needs and opportunities;

 

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

 

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

 

·The demand for our products or for the goods into which our products are incorporated;

 

·Our expectation that order commitments and non-cancellable orders we received are properly executed;

 

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

 

·The impact of any supply chain disruption that we may experience;

 

·Our dependency on the timely supply of equipment and materials from our third-party suppliers;

 

·Our ability to protect our intellectual property rights;

 

·Our ability to keep pace with technical advances in cryptography and semiconductor design;

 

·Our ability to raise funds for investment by cash flow from operating activities, advance payments from a key customer, and grants and other available subsidies from funding agencies;

 

·Our ability to reduce our cost structure and general and administrative costs;

 

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

 

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

 

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

 

·The potential impact of the COVID-19 pandemic, other pandemics or health emergencies affecting our clients’ ability and willingness to spend money in security applications and our supplier’s ability to source key components and material;

 

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

 

·Risks relating to WISeKey’s ability to implement its growth strategies and its Group’s restructuring;

 

·Our ability to achieve some or all of the expected benefits from the spin-off of SEALSQ Corp;

 

·Our ability to successfully hire and retain qualified employees and key personnel;

 

5 

 

 

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

 

·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;

 

·Market demand and semiconductor industry conditions;

 

·Our ability to successfully introduce new technologies and products;

 

·Uncertain negative effect of the COVID-19 pandemic and its effect on the supply chain;

 

·The cyclical nature of the semiconductor industry;

 

·An economic downturn in the semiconductor industry;

 

·Our ability to comply with U.S. and other applicable international laws and regulations;

 

·Changes in our overall tax position as a result of changes in tax laws or tax rates, new or revised legislation, the outcome of tax audits or changes in international tax treaties which may impact our results of operations as well as our ability to accurately estimate tax credits, benefits, deductions and provisions and to realize deferred tax assets;

 

·Fluctuations in the exchange rates between the U.S. dollar and the other major currencies we use for our operations;

 

·Our ability to collect accounts receivable;

 

·Changes in certain commodities used as raw material, which may affect our gross margin;

 

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

 

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.

 

6 

 

 

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.RESERVED

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

Summary of Risk Factors

 

Investing in our Class B Shares and ADSs may expose you to a number of risks, including risks relating to our business and industry, financial risks, legal risks, and risks relating to our Class B Shares and ADSs. The following summarizes part, but not all, of these risks. Please carefully consider all of the information discussed in Item 3. Key Information—D. Risk Factors and elsewhere in this annual report which contains a more thorough description of risks relating to investing in us.

 

·The semiconductor industry is highly cyclical and highly competitive. If we fail to introduce new technologies and products in a timely manner, this could adversely affect our business.

 

·Significantly increased volatility and instability and unfavorable economic conditions may adversely affect our business.

 

·The demand for our products depends to a significant degree on the demand for our customers’ end products.

 

·The semiconductor industry is characterized by continued price erosion, especially after a product has been on the market.

 

·Failure to protect our intellectual property could substantially harm our business, operating results, and financial condition.

 

·We face competition from companies that are larger and better known, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

 

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

 

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

 

·Changes in regulations or citizen concerns regarding privacy and protection of citizen data, or any failure or appearance of failure to comply with such laws, could diminish the value of our services and cause us to lose customers and revenue.

 

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·If our security systems are breached, we may face civil liability, and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract and retain customers.

 

·Our business model consists in promoting trust and security, and it depends on trust in our brand. Negative media coverage could adversely affect our brand and any failure to maintain, protect, and enhance our brand would hurt our ability to retain or expand our customer base.

 

·We depend on our customers’ ability to sell their products, which may pose challenges for our ability to forecast or optimize our inventory and sales.

 

·We may need to discontinue products and services. During the ramp-down of such products and services, we may experience a negative impact on our sales.

 

·We are a holding company with no direct cash generating operations and rely on our subsidiaries to provide us with funds necessary to pay dividends to shareholders.

 

·We may not achieve some or all of the expected benefits from the partial Spin-Off of SEALSQ Corp, and failure to achieve such benefits may adversely affect our business.

 

·We derive a significant amount of our revenues each year from a limited number of significant customers.

 

·Claims, litigation, government investigations, and other proceedings may adversely affect our business and results of operations.

 

·Employment laws in some of the countries in which we operate are relatively stringent.

 

·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.

 

·As a “foreign private issuer” (within the meaning of the U.S. Securities Act) we are entitled to claim exemptions from certain Nasdaq corporate governance standards, and, if we elected to rely on these exemptions, you may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.

 

·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.

 

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

  

Risks Related to Our Business and Industry

 

We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine, and more recently, the Israel-Hamas war. Our business, financial condition and results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.

 

U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine.

 

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In February 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business. Additionally, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties being levied by the United States, the European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, payment system, expansive ban on imports and exports of products to and from Russia and ban on exportation of U.S. denominated bank notes to Russia or persons located there. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets.

 

Additionally, on October 7, 2023, Hamas, a U.S. designated terrorist organization, launched a series of coordinated attacks from the Gaza Strip onto Israel. On October 8, 2023, Israel formally declared war on Hamas, and the armed conflict is ongoing as of the date of this filing.

 

Although our operations have not experienced material and adverse impact on supply chain, cybersecurity or other aspects of our business from the ongoing conflict between Russia and Ukraine, or from the war between Israel and Hamas, nor from any associated event such as the Red Sea shipping crisis, there is no assurance that such conflicts and events would not develop or escalate in a way that could materially and adversely affect our business, financial condition, and results of operations in the future.

 

We face many risks associated with our international expansion, including geopolitical tensions, trade barriers, payment delays and currency failures.

 

We are continuing to expand our operations into additional international markets. 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, 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.

 

Offering our services in a new geographical area also poses geopolitical risks. For example, export and import of cryptographic technologies is subject to sanctions, and national import and export restrictions. Changes in these restrictions due to geopolitical tensions may significantly harm our business.

 

As a result of these obstacles, we may find it impossible or prohibitively expensive to enter additional markets, or our entry into foreign markets could be delayed, which could hinder our ability to grow our business.

 

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;

 

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

 

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  · 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 give rise to restatements of, or irregularities in, financial statements;

 

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

 

  · 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.

 

Global inflationary pressure may have an adverse impact on our gross margins and our business.

 

As of December 31, 2023, global inflationary pressure has not materially affected our gross margins and our business. Our suppliers, which are all based in Asia, have not been impacted by the price inflation for energy that Europe and other geographies have experienced, nor from some raw material price inflation which might impact other industries. For fiscal year 2024, we are likely to incur payroll cost increases for some of our employees in order to retain and hire engineers given the strong local demand for experienced software and hardware engineers. While we believe that these costs will be balanced by the US Dollar to Euro exchange rate evolution which has absorbed the extra costs caused by the salary increase, there is no assurance that this cost balance will continue. Accordingly, continued inflationary pressure may have an adverse impact on our gross margins and could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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.

 

We depend on our ability to keep pace with technical advances in cryptography and semiconductor design.

 

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 security and communications technologies and to the development of new and improved devices, services, semiconductors and software 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, hardware and software technologies and evolving industry standards, the existing 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.

 

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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 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;

 

·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 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.

 

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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;

 

·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.

 

The demand for our semiconductors products depends to a significant degree on the demand for our customers’ end products.

 

The vast majority of our IoT revenue is derived from sales to manufacturers in the IT infrastructure (Network Servers, Switch, Home boxes, PC Keyboards, etc.), utilities distribution edge infrastructure (Smart Meters) and Access Control modules. Demand in these markets fluctuates significantly, driven by consumer spending, consumer preferences, the development of new technologies and prevailing economic conditions. In addition, the specific products in which our semiconductors are incorporated may not be successful or may experience price erosion or other competitive factors that affect the price manufacturers are willing to pay us. Such customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times. This is particularly common during periods of low demand. This can make managing our business difficult, as it limits the predictability of future revenue. It can also affect the accuracy of our financial forecasts. Furthermore, developing industry trends, including customers’ use of outsourcing and new and revised supply chain models, may affect our revenue, costs and working capital requirements.

 

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If customers do not purchase products made specifically for them, we may not be able to resell such products to other customers or may not be able to require the customers who have ordered these products to pay a cancellation fee. The foregoing risks could have a material adverse effect on 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;

 

·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 fulfill the volume predictions that were used in the pricing negotiations and forecasts.

 

The design of many industrial devices 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.

 

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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 market demand for the next evolution of such technology remains unknown. Our potential customers need to accept 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 customers. 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 WISeKey value proposition and their ability to support the implementation.

 

Our research and development efforts may not produce successful products or enhancements to our security 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.

 

Any decline in demand for our products from our clients could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

Our business is at risk of our clients delaying or withdrawing purchase orders for items where we already committed to the production of these pieces. In these situations, and when sufficient notice is given, we are usually able to adjust our production schedules such that the production can be transferred to alternative clients thereby limiting our exposure. However, there can be a short-term impact upon the levels of stock that we hold at any given point in time. As our products have a lengthy development cycle, often being in the region of 18 to 24 months from design-win to delivering the first batch of finished goods, we are not susceptible to losing clients without a lengthy notice period, so there is a very limited risk that we find ourselves holding material amounts of stocks of finished goods that will not be eventually delivered to our clients. The greatest risk is that a client might reduce their production allocations with the Company and, in this instance, we would be required to adapt our purchase requirements accordingly. Most of our raw materials (in particular our wafers) can be redirected to alternative products and so the risk is limited to finished goods. In the event that a client was to significantly reduce demand with a limited lead-time and not place new orders for that product at a later stage, this could lead to some finished goods becoming obsolete, but this risk is considered remote by management. The main risk arising from a decline in demand for our products from one of our top ten clients is that we would need to find new sources of revenue to replace the departing clients.

 

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.

 

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If we experience software errors and non-compliance, this 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.

 

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 products 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.

 

We depend on highly skilled key personnel to operate our business, and if we are unable to attract, retain, and motivate qualified personnel, our business could be harmed.

 

We believe that our future success is highly dependent on the talents and contributions of our senior management, including Carlos Moreira, founder and Chief Executive Officer of WISeKey, members of our executive team, and other key employees, such as key engineering, finance, research and development, marketing, and sales personnel. Our future success depends on our continuing ability to attract, develop, motivate, and retain highly qualified and skilled employees. All of our employees, including our senior management, are free to terminate their employment relationship with us at any time, and their knowledge of our business and industry may be difficult to replace.

 

Furthermore, our 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.

 

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Qualified individuals are in high demand, particularly in the digital industry, and we may incur significant costs to attract them. If we are unable to attract and retain our senior management and key employees, we may not be able to achieve our strategic objectives, and our business could be harmed. In addition, we believe that our senior management have developed highly successful and effective working relationships. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If one or more of these individuals leave, we may not be able to fully integrate new senior management or replicate the current dynamic and working relationships that have developed among our senior management and other key personnel, and our operations could suffer.

 

The tight global labor market has created an incredibly intense hiring environment. Since we require a highly skilled workforce in order to successfully compete in an increasingly competitive cybersecurity market, we have experienced and may continue to experience difficulty in hiring, high employee turnover, and considerable costs and productivity as well as time to market losses. 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.

 

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. A member of the two-member foundation board of OISTE is a WISeKey board member. 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.

 

Our services and products are relying heavily on cryptography, in particular, 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.

 

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Quantum computing may threaten the resilience of current cryptography against attacks during the current lifespan of hardware. This is certainly the case for our secure modules embedded in larger systems and/or deployed on remote locations, such as for smart meter and satellite deployments.

 

WISeKey cannot guarantee that its services and products will still offer sufficient protection against attacks executed with quantum computers.

 

We are dependent on the timely supply of equipment and materials from various sub-contractors and if any one of these suppliers fails to meet, or delays, their committed delivery schedules due to supply chain disruptions or other reasons, 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. During the latter half of 2021 and 2022, we had to manage our delivery schedule carefully as a result of the global shortage of semiconductors material. During this period, the Company was receiving greater volumes of orders than it was capable of delivering due to such shortages, so we had to program the orders based upon the allocations of materials and production capacity available to us. While we were able to grow our revenue during this time though careful negotiation with our suppliers, we believe that our revenues would have been higher had there not been such supply disruption. Further, our business and operating conditions can be at risk if we cannot deliver on our product demand as committed in our customer contracts. The global shortage was alleviated in 2023 meaning that the same constraints were no longer applicable during that year and currently, we do not have issues around supply allocations.

 

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.

 

If WISeKey does not include post-quantum crypto libraries in its semiconductors, WISeKey may fail to offer its customers sufficient protection against attacks executed with quantum computers.

 

Quantum computing may threaten the resilience of current cryptography against attacks during the current lifespan of hardware, especially in case our secure modules are embedded in larger systems and/or deployed on remote locations, such as smart meters and satellite deployments. WISeKey cannot guarantee that its secure modules will still offer sufficient protection against attacks executed with quantum computers. To mitigate this risk, WISeKey has launched an R&D program for assessing the portability and resistance of 2 of the algorithms shortlisted by the National Institute of Standards & Technology (NIST) as part of its post-quantum algorithms selection contest. This program is carried in partnership with l’Ecole des Mines (a very prestigious French engineering university).

 

If WISeKey does not respond to the trend of embedding secure modules on central processing units, WISeKey may lose the market of separate secure module chips.

 

The processor industry is rapidly changing with ARM-based processors that extend central processing units with ancillary functions such as graphics processing, neural processing and secure modules. WISeKey cannot guarantee that its secure modules will still be needed as separate tamper-proof chip. To mitigate this risk, WISeKey has launched an R&D program for building a “secure enclave”, which will complement its secure modules offer.

 

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The semiconductor industry is highly cyclical.

 

Historically, the relationship between supply and demand in the semiconductor industry has caused a high degree of cyclicality in the semiconductor market. Semiconductor supply is partly driven by manufacturing capacity, which in the past has demonstrated alternating periods of substantial capacity additions and periods in which no or limited capacity was added. As a general matter, semiconductor companies are more likely to add capacity in periods when current or expected future demand is strong and margins are, or are expected to be, high. Investments in new capacity can result in overcapacity, which can lead to a reduction in prices and margins. In response, companies typically limit further capacity additions, eventually causing the market to be relatively undersupplied. In addition, demand for semiconductors varies, which can exacerbate the effect of supply fluctuations. As a result of this cyclicality, the semiconductor industry has, in the past, experienced significant downturns, such as in 1997/1998, 2001/2002 and in 2008/2009, often in connection with, or in anticipation of, maturing life cycles of semiconductor companies’ products and declines in general economic conditions. These downturns have been characterized by diminishing demand for end-user products, high inventory levels, under-utilization of manufacturing capacity and accelerated erosion of average selling prices. The foregoing risks have historically had, and may continue to have, a material adverse effect on our business, financial condition and results of operations. 

 

Significantly increased volatility and instability, and unfavorable economic conditions may adversely affect our semiconductor business.

 

It is difficult for us, our semiconductor customers and suppliers to forecast demand trends. We may be unable to accurately predict the extent or duration of cycles or their effect on our financial condition or result of operations, and can give no assurance as to the timing, extent or duration of the current or future semiconductor business cycles generally, or specific to the markets in which we participate. In the event of a future decline in global economic conditions, our business, financial condition and results of operations could be materially adversely affected, and the resulting economic decline might disproportionately affect the markets in which we participate, further exacerbating a decline in our results of operations. The COVID-19 global pandemic, for example, created a period of significant instability in the global economy, including amongst our semiconductor clients and suppliers. The restrictions imposed upon people and businesses around the world served, in the short run, to reduce demand for our semiconductor products as many companies reduced or paused their operations. While this has since served to benefit WISeKey through the increased demand for IT network infrastructure amongst other examples, this may not always be the situation.

 

The semiconductor industry is highly competitive. If we fail to introduce new technologies and products in a timely manner, this could adversely affect our business.

 

The semiconductor industry is highly competitive and characterized by constant and rapid technological change, short product lifecycles, significant price erosion and evolving standards. Accordingly, the success of our IoT segment business depends to a significant extent on our ability to develop new technologies and products that are ultimately successful in the market. The costs related to the research and development necessary to develop new technologies and products are significant and any reduction of our research and development budget could harm our competitiveness. Meeting evolving industry requirements and introducing new products to the market in a timely manner and at prices that are acceptable to our customers are significant factors in determining our competitiveness and success. Commitments to develop new products must be made well in advance of any resulting sales, and technologies and standards may change during development, potentially rendering our products outdated or noncompetitive before their introduction. If we are unable to successfully develop new products, our revenue may decline substantially. Moreover, some of our competitors are well-established entities, are larger than us and have greater resources than we do. If these competitors increase the resources they devote to developing and marketing their products, we may not be able to compete effectively. Any consolidation among our competitors could enhance their product offerings and financial resources, further strengthening their competitive position. In addition, some of our competitors operate in narrow business areas relative to us, allowing them to concentrate their research and development efforts directly on products and services for those areas, which may give them a competitive advantage. As a result of these competitive pressures, we may face declining sales volumes or lower prevailing prices for our products, and we may not be able to reduce our total costs in line with this declining revenue. If any of these risks materialize, they could have a material adverse effect on our business, financial condition and results of operations.

 

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The demand for our semiconductor products depends to a significant degree on the demand for our customers’ end products. 

 

The vast majority of our IoT segment revenue is derived from sales to manufacturers in the IT infrastructure (Network Servers, Switch, Home boxes, PC Keyboards, etc.), utilities distribution edge infrastructure (Smart Meters) and Access Control modules. Demand in these markets fluctuates significantly, driven by consumer spending, consumer preferences, the development of new technologies and prevailing economic conditions. In addition, the specific products in which our semiconductors are incorporated may not be successful or may experience price erosion or other competitive factors that affect the price manufacturers are willing to pay us. Such customers have in the past, and may in the future, vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times. This is particularly common during periods of low demand. This can make managing our semiconductor business difficult, as it limits the predictability of future revenue. It can also affect the accuracy of our financial forecasts. Furthermore, developing industry trends, including customers’ use of outsourcing and new and revised supply chain models, may affect our revenue, costs and working capital requirements.

 

If semiconductor customers do not purchase products made specifically for them, we may not be able to resell such products to other customers or may not be able to require the customers who have ordered these products to pay a cancellation fee. The foregoing risks could have a material adverse effect on our business, financial condition and results of operations.

 

The semiconductor industry is characterized by continued price erosion, especially after a product has been on the market.

 

One of the results of the rapid innovation in the semiconductor industry is that pricing pressure, especially on products containing older technology, can be intense. Product life cycles are relatively short and, as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis.

 

In turn, demand for older technology falls, causing the price at which such products can be sold to drop, in some cases precipitously. In order to continue profitably supplying these products, we must reduce our production costs in line with the lower revenue we can expect to generate per unit. Usually, this must be accomplished through improvements in process technology and production efficiencies. If we cannot advance our process technologies or improve our production efficiencies to a degree sufficient to maintain required margins, we will no longer be able to make a profit from the sale of these products. Moreover, we may not be able to cease production of such products, either due to contractual obligations or for customer relationship reasons, and as a result may be required to bear a loss on such products. We cannot guarantee that competition in our core product markets will not lead to price erosion, lower revenue or lower margins in the future. Should reductions in our manufacturing costs fail to keep pace with reductions in market prices for the products we sell, this could have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to forecast our future results of operations and plan for and model future growth is limited and subject to a number of uncertainties due to recent changes in our context as well as in our own sales organization and go-to-market strategies.

 

Even though our heritage started before 2000, much of our business has changed in recent periods. Macro changes impacting our market, particularly the digital transformation induced by the Covid pandemic, competitors suffering supply chain shortages, and the increased use of Internet of Things (IoT) resulted in growing demand for our products.

 

To address this demand, we made substantial investments in our sales force. Additionally, we have also recently begun to focus on building relationships with potential distribution partners, to utilize their sales force resources to reach new customers. As a result of these recent changes in our market, sales organization and go-to-market strategies, and with our limited operating history, our ability to forecast our future results of operations and plan for and model future growth is limited and subject to a number of uncertainties.

 

We have encountered and will continue to encounter risks and uncertainties in developing markets. If our assumptions regarding these risks and uncertainties are incorrect or change in response to developments in the security market, our results of operations and financial results could differ materially from our plans and forecasts. If we are unable to achieve our key objectives, our business and results of operations will be adversely affected, and the fair market value of our common stock could decline.

 

Our growth prospects and revenue will be adversely affected if our efforts to attract prospective customers and to retain existing customers are not successful.

 

Our ability to grow our business and generate revenue depends on retaining and expanding our total customer base and increasing services revenue by effectively monetizing value added. We must convince prospective customers of the benefits of our solutions and our existing customers of the continuing value of our solutions. Our ability to attract new customers, retain existing customers, and reach out to new markets depends in large part on our ability to continue to offer leading technologies and products, superior security and trust, and integration capabilities. For instance, in our IoT segment, some of our semiconductor competitors, including Infineon, Microchip, NXP and STMicroelectronics, have developed, and are continuing to develop, secure elements, which puts us at a significant competitive disadvantage.

 

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Additionally, management expects 2024 to be a transition year where the focus of customer demand will shift to the next generation of products, which is likely to impair WISeKey’s growth in its core business relating to our existing solutions. Our continued growth is therefore heavily dependent upon the successful attraction of prospective customers in new markets, both geographic and product, such as with secure transport of goods through the global, real-time tracking and tracing capabilities in conjunction with WISeSat.

 

Failure to protect our intellectual property could substantially harm our business, operating results, and financial condition.

 

The success of our business depends on our ability to protect and enforce our patents, trade secrets, trademarks, copyrights, and all of our other intellectual property rights, including the silicon intellectual property rights of our semiconductors.

 

We attempt to protect our intellectual property under patent, trade secret, trademark, and copyright law through a combination of employee, third-party assignment and nondisclosure agreements, other contractual restrictions, technological measures, and other methods. These afford only limited protection and we are still early in the process of securing our intellectual property rights. Despite our efforts to protect our intellectual property rights and trade secrets, unauthorized parties may attempt to copy aspects of our technology, or obtain and use our trade secrets and other confidential information. Moreover, policing our intellectual property rights is difficult and time consuming. We cannot assure you that we would have adequate resources to protect and police our intellectual property rights, and we cannot assure you that the steps we take to do so will always be effective.

 

We have filed, and may in the future file, patent applications on certain of our innovations. It is possible, however, that these innovations may not be patentable. In addition, given the cost, effort, risks, and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for some innovations. Furthermore, our patent applications may not issue as granted patents, the scope of the protection gained may be insufficient or an issued patent may be deemed invalid or unenforceable. We also cannot guarantee that any of our present or future patents or other intellectual property rights will not lapse or be invalidated, circumvented, challenged, or abandoned. Neither can we guarantee that our intellectual property rights will provide competitive advantages to us. Our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes could be limited by our relationships with third parties, and any of our pending or future patent applications may not have the scope of coverage originally sought. We cannot guarantee that our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak. We could lose both the ability to assert our intellectual property rights against, or to license our technology to, others and the ability to collect royalties or other payments.

 

Litigation or proceedings before governmental authorities and administrative bodies may be necessary in the future to enforce our intellectual property rights, to protect our patent rights, trademarks, trade secrets, and domain names and to determine the validity and scope of the proprietary rights of others. Our efforts to enforce or protect our proprietary rights may be ineffective and could result in substantial costs and diversion of resources and management time, each of which could substantially harm our operating results. Additionally, changes in law may be implemented, or changes in interpretation of such laws may occur, that may affect our ability to protect and enforce our patents and other intellectual property.

 

Assertions by third parties of infringement or other violation by us of their intellectual property rights could harm our business, operating results, and financial condition.

 

Third parties may assert that we have infringed, misappropriated, or otherwise violated their copyrights, patents, and other intellectual property rights, and, as we face increasing competition, the possibility of intellectual property rights claims against us grows.

 

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Our ability to provide our services is dependent upon our ability to license intellectual property rights, including to semiconductor designs. Various laws and regulations govern the copyright and other intellectual property rights associated with semiconductor design and cryptographic algorithms. Existing laws and regulations are evolving and subject to different interpretations, and various legislative or regulatory bodies may expand current or enact new laws or regulations. Although we expend significant resources to seek to comply with the statutory, regulatory, and judicial frameworks by, for example, entering into license agreements, we cannot assure you that we are not infringing or violating any third-party intellectual property rights, or that we will not do so in the future.

 

Moreover, for our semiconductor solutions, we rely on multiple hardware designers, and firmware and software programmers to design our proprietary technologies. Although we make every effort to prevent the incorporation of licenses that would require us to disclose code and/or innovations in our products, we do not exercise complete control over the development efforts of our developers, and we cannot be certain that our developers have not used designs or software that is subject to such licenses or that they will not do so in the future. In the event that portions of our proprietary technology are determined to be subject to licenses that require us to publicly release the affected portions of our semiconductor design and source code, re-engineer a portion of our technologies, or otherwise be limited in the licensing of our technologies, we may be forced to do so, each of which could materially harm our business, operating results, and financial condition.

 

We derive a significant amount of our revenues each year from a limited number of significant customers.

 

We derive a significant amount of our revenues each year from a small number of customers. In the year ended December 31, 2023, our ten largest customers accounted for 90% of our revenue. Our business and results of operations are largely dependent upon the success of our significant customers. The loss of any large customer, a decline in the volume of sales to these customers or the deterioration of their financial condition could adversely affect our business, results of operations and financial conditions.

 

One of our largest customers is CISCO Systems International (“Cisco”).  We operate under the terms of a Master Purchase Agreement, dated August 14, 2014.  Such agreement defines, among other things:

 

  · the communication process that we shall respect vis a vis forecasting / pricing update, such as determination of price reflecting component prices in effect on the date of shipment to Cisco’s authorized contract manufactures (“EMS Providers”), representations and warranties that the product price are, and shall be, no higher than the lowest prices offered by the Company to any customer purchasing the same or lesser total sales or unit volume on an annual basis;
  · buffer stock, timing and volume constitution rules, including but not limited to, obligations to make commercially reasonable efforts to conduct capacity and materials planning and management sufficient to meet EMS Provider’s forecast at the period of time agreed between WISeKey and EMS Providers,
  · list of contract manufacturers to whom we are allowed to take purchase orders and to make deliveries;
  · rules of fair treatment in case capacity shortage, that is, an obligation to provide Cisco, EMS Providers and any third party designated by Cisco an allocation of products during its shortage that is no less favorable than that provided to any other customer;
  · warranties, including but not limited to, three years warranty period, delivered product having no less than eight remaining weeks of shelf-life, replacement of defected products within two business days in general;
  · epidemic failure rules/treatment. Epidemic failure shall be recognized when a single failure mode in excess of 1% of the product or a multiple failure more in excess of 3% of the product, during any rolling 3-full calendar month period, occurs. If an Epidemic failure happens during the five-year period after the delivery of a product, the Company is contractually required to notify to Cisco, provide a preliminary plan for problem diagnosis within one business day of the notification, and compensate Cisco for all reasonable costs incurred by Cisco, EMS Providers and any third party designated by Cisco, subject to the liability exclusions and limitations set forth in the agreement.  

 

Any decline in demand for our IoT products from our clients could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

Our IoT segment is at risk of our clients delaying or withdrawing purchase orders for items where we already committed to the production of these pieces. In these situations, and when sufficient notice is given, we are usually able to adjust our semiconductors production schedules such that the production can be transferred to alternative clients thereby

 

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limiting our exposure. However, there can be a short-term impact upon the levels of stock that we hold at any given point in time. As our products have a lengthy development cycle, often being in the region of 18 to 24 months from design-win to delivering the first batch of finished goods, we are not susceptible to losing clients without a lengthy notice period, so there is a very limited risk that we find ourselves holding material amounts of stocks of finished goods that will not be eventually delivered to our clients. The greatest risk is that a client might reduce their production allocations with the Company and, in this instance, we would be required to adapt our purchase requirements accordingly. Most of our raw materials (in particular our wafers) can be redirected to alternative products and so the risk is limited to finished goods. In the event that a client was to significantly reduce demand with a limited lead-time and not place new orders for that product at a later stage, this could lead to some finished goods becoming obsolete, but this risk is considered remote by management. The main risk arising from a decline in demand for our products from one of our top ten clients is that we would need to find new sources of revenue to replace the departing clients.

 

We depend on our ability to attract new customers and to maintain and grow existing customers, and failure to do so may harm our future revenues and operating results.

 

Our success depends in large part on our ability to attract new customers (“hunting”) and to expand within existing customers (“farming”). The number of new customers and the growth at existing customers 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.

 

The use of cryptography is subject to a variety of laws around the world. Unfavorable developments in legislation and regulation may adversely affect our business, operating results, and financial condition.

 

The use of cryptography is subject to a variety of laws around the world. Government regulation of the internet is evolving and any changes in government regulations relating to the internet or other areas of our business or other unfavorable developments may adversely affect our business, operating results, and financial condition.

 

For example, the U.S. agency NIST is in the process of selecting post-quantum cryptographic algorithms for all governmental use of cryptography. We depend on their final selection to make our products successful and, should we fail to be able to implement the finally selected algorithm, our ability to serve the U.S. market and by extension the rest of the world may be severely impacted.

 

Our IoT supply chain depends on third-party suppliers. Failure of one of our suppliers to handle increased demand 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 increased at the discretion of the third-party vendor.

 

Our agreement with one of our third-party suppliers, Presto Engineering Inc., defines, among other things,

 

·the list of operational obligations that they shall execute for us. Presto’s services include New Production Introduction (“NPI”), such as planning of validation and qualification activities, engineering evaluation of the product and preliminary test solution, and product release to industrial maturity, and Supply Chain Management (“SCM”);

 

·the On-Time Delivery objectives and rules. Presto is required to provide its SCM service based on agreed targets for On Time Delivery (“OTD”). OTD is defined numerically and it constitutes result obligations under French laws, which govern the agreement;

 

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·Their obligations vis a vis our quality process and our security process, including their obligations to be audited on a yearly basis.

 

Although common in our industry, we do not have agreements with any other of our major third-party suppliers. Rather, the Company provides such suppliers with purchase orders on a quarterly basis which triggers the launch of manufacturing of the Company’s products. The Company has weekly discussions and provides the suppliers with 12 month rolling forecasts to allow them to anticipate equipment allocations and raw material supplies. However, since we do not have written agreements with these suppliers, we are subject to the risk that any of these suppliers could terminate their relationship with us, leaving us without critical products, software or other services needed to operate our business.

 

Our IC products mainly depend on supplies from third-party foundries, and any failure to obtain sufficient foundry capacity from such foundries would significantly delay the shipment of our products.

 

Our IoT segment is a fabless IC design business and, as such, we do not own any IC fabrication facilities. We currently work with two leading foundries as our main IC fabrication partners and place purchase orders according to our business needs. It is important for us to have a reliable relationship with third-party foundries as well as other future foundry service providers to ensure adequate product supply to respond to customer demand.

 

We cannot guarantee that our foundry service providers will be able to meet our manufacturing requirements. The ability of our foundry service providers to provide us with foundry services is limited by available capacity. If any of our foundry service providers fails to succeed in their capacity promise, it will not be able to deliver to us ICs as per the Purchase Orders that we have placed to them, which will significantly affect our shipment of our products and solutions. This could in turn result in lost sales and have a material adverse effect on our relationships with our customers and on our business and financial condition. In addition, we do not have a guaranteed level of production capacity from our foundry service providers. We do not have long-term contracts with them, and we source our supplies on a purchase order basis. As a result, we depend on our foundry service providers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, produce products of acceptable quality and at acceptable final test yields and deliver those products to us on a timely basis and at acceptable prices. If any of our foundry service providers raises its prices or is unable to meet our required capacity for any reason, such as shortages or delays in the shipment of semiconductor equipment or raw materials required to manufacture our ICs, or if our business relationships with any of our foundry service providers deteriorate, we may not be able to obtain the required capacity and would have to seek alternative foundries, which may not be available on commercially reasonable terms, or at all. Moreover, it is possible that other customers of any of our foundry service providers that are larger and/or better financed than we are, or that have long-term contracts with it, may receive preferential treatment in terms of capacity allocation or pricing. In addition, if we do not accurately forecast our capacity needs, any of our foundry service providers may not have available capacity to meet our immediate needs or we may be required to pay higher costs to fulfill those needs, either of which could materially and adversely affect our business, results of operations or financial condition.

 

Other risks associated with our dependence on third-party foundries include limited control over delivery schedules and quality assurance, lack of capacity in periods of excess demand, unauthorized use of our intellectual property and limited ability to manage inventory and parts. In particular, although we have entered into confidentiality agreements with our third-party foundries for the protection of our intellectual property, they may not protect our intellectual property with the same degree of care as we use to protect our intellectual property. If we fail to properly manage any of these risks, our business and results of operations may be materially and adversely affected.

 

Moreover, if any of our foundry service providers suffers any damage to its facilities, suspends manufacturing operations, loses benefits under material agreements, experiences power outages or computer virus attacks, lacks sufficient capacity to manufacture our products, encounters financial difficulties, is unable to secure necessary raw materials from its suppliers or suffers any other disruption or reduction in efficiency, we may encounter supply delays or disruptions.

 

We rely on a limited number of third parties for IC packaging and testing services.

 

In relation to our IoT segment, fabrication of ICs requires specialized services to process the silicon wafers into ICs by packaging them and to test their proper functioning. We primarily collaborate with a Outsource Semiconductors Assembly and Testing (OSAT) provider for such services, which may expose us to a number of risks, including difficulties in finding alternate suppliers, capacity shortages or delays, lack of control or oversight in timing, quality or costs, and misuse of our intellectual property. If any such problems arise with our packaging and testing partners, we may experience delays in our production and delivery timeline, inadequate quality control of our products or excessive costs and expenses. As a result, our financial condition, results of operations, reputation and business may be adversely affected.

 

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Failure at tape-out or failure to achieve the expected final test yields for our ICs could negatively impact our results of operations.

 

The tape-out process is a critical milestone in our IoT segment. A tape-out means all the stages in the design and verification process of our ICs have been completed, and the chip design is sent for manufacturing. The tape-out process requires considerable investment in time and resources and close cooperation with the wafer foundry, and repeated failures can significantly increase our costs, lengthen our product development period, and delay our product launch. If the tape-out or testing of a new chip design fails, either as a result of design flaws by our research and development team or problems with production or the testing process by the wafer foundry, we may incur considerable costs and expenses to fix or restart the design process. Such obstacles may decrease our profitability or delay the launch of new products.

 

Once tape-out is achieved, the IC design is sent for manufacturing, and the final test yield is a measurement of the production success rate. The final test yield is a function of both product design, which is developed by us, and process technology, which typically belongs to a third-party foundry. Low final test yields can result from a product design deficiency or a process technology failure or a combination of both. As such, we may not be able to identify problems causing low final test yields until our product designs go to the manufacturing stage, which may substantially increase our per unit costs and delay the launch of new products.

 

Changes in regulations or citizen concerns regarding privacy and protection of citizen data, or any failure or appearance of failure to comply with such laws, could diminish the value of our services and cause us to lose customers and revenue.

 

The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission, and security of personal information by companies operating over the internet have recently come under increased public scrutiny.

 

The U.S. government, including the Federal Trade Commission and the Department of Commerce, may continue to review the need for greater regulation over the collection of information concerning consumer behavior on the internet, including regulation aimed at restricting certain targeted advertising practices.

 

Additionally, the EU may continue to review the need for greater regulation or reform to its existing data protection legal framework, which may result in a greater compliance burden for companies with users in Europe. Various government and consumer agencies also have called for new regulation and changes in industry practices. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that requires changes to these practices, the design of our website, services, features, or our privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven by our ability to responsibly use the personal data that our customers share with us.

 

Therefore, our business could be harmed by any significant change to applicable laws, regulations, or industry practices regarding the use of our customers’ personal data, for example regarding the manner in which disclosures are made and how the express or implied consent of customers for the use of personal data is obtained. Such changes may require us to modify our services and features, possibly in a material manner, and may limit our ability to develop new services and features that make use of the data that our customers voluntarily share with us. In addition, some of our developers or other partners, such as those that help us measure the effectiveness of advertisements, may receive or store information provided by us or by our customers through mobile or web applications integrated with our services. We provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our customers’ data may be improperly accessed, used, or disclosed.

 

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Cybersecurity incidents, including data security breaches or computer viruses, could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to liability.

 

We receive, process, store and transmit, often electronically, the data of our customers and others, much of which is confidential. Unauthorized access to our computer systems or stored data could result in the theft, including cyber-theft, or improper disclosure of confidential information, and the deletion or modification of records could cause interruptions in our operations. These cyber-security risks increase when we transmit information from one location to another, including over the Internet or other electronic networks. Despite the security measures we have implemented, our facilities, systems and procedures, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming or human errors or other similar events which may disrupt our delivery of services or expose the confidential information of our customers and others. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information of our customers or others, whether by us or a third party, could subject us to civil and criminal penalties, have a negative impact on our reputation, or expose us to liability to our customers, third parties or government authorities. We are not aware of such breaches or any other material cyber-security risks in our supply chain to date. Any of these developments could have a material adverse effect on our business, results of operations and financial condition.

 

To mitigate these risks, we comply with one of the highest security standards in our industry: Webtrust, ISO27001 and the "Common Criteria" standard. Compliance with these standards require us to implement, monitor and audit on a yearly basis all the processes where we, or our third-party suppliers, manipulate sensitive data. This includes our supply chain processes and partners which, like us, are audited every year by security experts certified by governmental authorities. In addition, one of our customers, Cisco, also conducts an independent and extensive audit to control our processes and propose improvements.

 

Our security processes are piloted by a Global Security Director, under the supervision of a Security Board, which includes the top management of WISeKey. Once a year, the Global Security Director reassesses our cybersecurity risks and proposes to the Security Board a plan of action and budget for the year to come.

 

The Executive Board Members of WISeKey hold a weekly meeting to discuss all matters including operational matters and risk management, as well as holding regular, wider meetings with the Senior Management of WISeKey. During these meetings, the risks faced by the business and any new matters arising or potential threats identified are discussed. The WISeKey management team also provide updates on their ongoing projects designed to manage these risks, as well as presenting the results of any audits that are being carried out. The full Board are also kept appraised on the results of all audits carried out during the year and are required to decide on strategic decisions such as whether to attain accreditations for the business. The Board and Audit Committee are responsible also for overseeing the annual audit of WISeKey which, while primarily focused on the financials of WISeKey, does also cover certain risks associated with the business.

 

If our security systems are breached, we may face civil liability, and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract and retain customers.

 

Techniques used to gain unauthorized access to data and software are constantly evolving, and we may be unable to anticipate or prevent unauthorized access to cryptographic data. Our software services, which are supported by our own systems and those of third parties that we work with, are vulnerable to software bugs, computer viruses, internet worms, break-ins, phishing attacks, attempts to overload servers with denial-of-service, or other attacks and similar disruptions from unauthorized use of our and third-party computer systems, any of which could lead to system interruptions, delays, or shutdowns, causing loss of critical data or the unauthorized access to personal data.

 

Computer malware, viruses, computer hacking, and phishing attacks have become more prevalent in our industry. WISeKey and WISeKey’s systems have been subject to such attacks in the past, albeit they have always been unsuccessful, and further such attempts to compromise our systems’ security may occur in the future. Because of our brand of trust and security, we believe that we are a particularly attractive target for such attacks. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, and availability of our products and technical infrastructure to the satisfaction of our customers may harm our reputation and our ability to retain existing customers and attract new customers. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, to disable undesirable accounts and activities on our platform, and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.

 

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Additionally, if an actual or perceived breach of security occurs to our systems or a third party’s platform, we may face regulatory or civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract and retain customers, which in turn would harm our efforts to attract and retain customers and business partners. We also would be required to expend significant resources to mitigate the breach of security and to address matters related to any such breach. We also may be required to notify regulators about any actual or perceived personal data breach (including the EU Lead Data Protection Authority) as well as the individuals who are affected by the incident within strict time periods.

 

Any failure, or perceived failure, by us to maintain the security of data relating to our customers, to comply with our posted privacy policy, laws and regulations, rules of self-regulatory organizations, industry standards, and contractual provisions to which we may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others, all of which could result in litigation and financial losses, and could potentially cause us to lose customers, advertisers, and revenues. In Europe, European Data Protection Authorities could impose fines and penalties of up to 4% of annual global turnover or €20 million, whichever is higher, for a personal data breach.

 

Our semiconductors and software services are highly technical and may contain undetected software bugs or vulnerabilities, which could manifest in ways that could seriously harm our reputation and our business.

 

Our semiconductors and software services are highly technical and complex and may contain undetected software bugs, hardware errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in our products, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled products.

 

Some errors in our products may be discovered only after a product has been used by customers and may in some cases be detected only under certain circumstances or after extended use. Any errors, bugs, or other vulnerabilities discovered in our code or back-end after delivery could damage our reputation, drive away customers, allow third parties to manipulate or exploit vulnerabilities.

 

We also could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and seriously harm our reputation and our business. In addition, if our liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be seriously harmed.

 

Interruptions, delays or discontinuations in service arising from our own systems or from third parties could impair the delivery of our services and harm our business.

 

We rely on systems housed in our own facilities and upon third parties, including bandwidth providers and third-party “cloud” data storage services, to enable our customers to receive our content in a dependable, timely, and efficient manner. We have experienced and may in the future experience periodic service interruptions and delays involving our own systems and those of third parties that we work with. Both our own facilities and those of third parties are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, and similar events. They also are subject to break-ins, sabotage, intentional acts of vandalism, the failure of physical, administrative, technical, and cyber security measures, terrorist acts, natural disasters, human error, the financial insolvency of third parties that we work with, and other unanticipated problems or events. The occurrence of any of these events could result in interruptions in our services and to unauthorized access to, or alteration of, the content and data contained on our systems and that these third parties store and deliver on our behalf.

 

Any disruption in the services provided by these third parties could materially adversely impact our business reputation, customer relations, and operating results. Upon expiration or termination of any of our agreements with third parties, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one third party to another could subject us to operational delays and inefficiencies until the transition is complete.

 

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Our business model consists in promoting trust and security, and it depends on trust in our brand. Negative media coverage could adversely affect our brand and any failure to maintain, protect, and enhance our brand would hurt our ability to retain or expand our customer base.

 

Maintaining, protecting, and enhancing our brand is critical to expanding our customer base, and will depend largely on our ability to continue to develop and provide top-level security. If we do not successfully maintain our brand, our business could be harmed.

 

Our brand may be impaired by a number of other factors, including a failure to protect the cryptographic keys, data and software of end customers, any failure to keep pace with technological advances on our platform or with our services, a failure to protect our intellectual property rights, or any alleged violations of law, regulations, or public policy. Further, if our partners fail to maintain high standards in the supply chain, or if we partner with supply chain partners that our customers reject, the strength of our brand could be adversely affected.

 

We have not historically been required to spend considerable resources to establish and maintain our brand. However, if we are unable to maintain the growth rate in our customer base, we may be required to expend greater resources on advertising, marketing, and other brand-building efforts to preserve and enhance brand awareness, which would adversely affect our operating results and may not be effective.

 

We depend on our IoT customers’ ability to sell their products, which that may pose challenges for our ability to forecast or optimize our inventory and sales.

 

Large IoT orders may depend on the ability of our customer to be awarded significant regional or national contracts. The design of many IoT devices comes with the risk that it 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. As such, the volume predictions that were used in the pricing negotiations and forecasts may not always be achievable by our customers and may adversely affect our operating results.

 

We may need to discontinue products and services. During the ramp-down of such products and services, we may experience a negative impact on our sales.

 

All products have a natural lifecycle that includes the inevitable end-of-life process. During the ramping down of a product, product family, or services there are many ways that our business operations can be challenged. Last-time-buys are a typical way for customers to deal with the end-of-life 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 or service 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.

 

Our use of artificial intelligence may adversely affect our business operations, products, or financial results.

 

We utilize AI in connection with the design of our semiconductors and in the development of our software services. AI helps reduce our development cycle timeline and AI is used to protect our chips against a new generation of attacks, such as side channel deep learning.  

 

Given the short time that has elapsed since AI became commercially viable and the rapid pace of change in the AI space, we may experience any number of difficulties in using AI technology, including with respect to product development. Additionally, there are significant risks involved in utilizing AI and there can be no assurance that the usage of AI will enhance our products or services, or be beneficial to our business, including our efficiency or profitability.

 

Utilizing AI may expose us to additional intellectual property, cybersecurity, operational, and technological risks, as the technologies underlying AI and its use are subject to a variety of laws, including intellectual property, privacy, and consumer protection. Further, AI is the subject of evolving review by various U.S. governmental and regulatory agencies, and other foreign jurisdictions. Any changes in laws, rules, directives, and regulations governing the use of AI may adversely affect the ability of our business to use AI.

 

The technologies underlying AI are complex and rapidly developing, and as a result, it is not possible to predict all of the legal, operational, or technological risks related to the use of AI.

 

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Obligations associated with being a public company require significant Company resources and management attention.

 

We are subject to the reporting requirements of the Securities Exchange Act, and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act. Section 404 of Sarbanes-Oxley requires that we evaluate and determine the effectiveness of our internal control over financial reporting.

 

We work with our legal, accounting and financial advisors to identify any areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. We evaluate areas such as corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We will make changes in any of these and other areas, including our internal control over financial reporting, which we believe are necessary. However, these and other measures we may take may not be sufficient to allow us to satisfy our obligations as a public company on a timely and reliable basis. In addition, compliance with reporting and other requirements applicable to public companies do create additional costs for us and require the time and attention of management. Our limited management resources may exacerbate the difficulties in complying with these reporting and other requirements while focusing on executing our business strategy. We may not be able to predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on our business.

 

If management is unable to provide reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our shares.

 

Under Section 404 of Sarbanes-Oxley, we are required to include in each of our annual reports on Form 20-F, a report containing our management’s assessment of the effectiveness of our internal control over financial reporting. If, in such annual reports on Form 20-F, our management cannot provide a report as to the effectiveness of our internal control over financial reporting as required by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our shares.

 

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;

 

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·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.

 

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, 2023, WISeKey had, on a consolidated level, an accumulated cumulative deficit of USD 280,960,811, compared to USD 265,635,281 as at December 31, 2022 and USD 238,159,600 as at December 31, 2021. 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 its 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 over 30% of the Company's voting rights as at December 31, 2023. Further, all holders of the Class A Shares represent approximately 35% of the Company's voting rights as at December 31, 2023. 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.

 

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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;

 

·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 are 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 take places 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.

 

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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, 2023, the board of directors is authorized to issue up to 1,618,117 new Class B Shares out of authorized capital at any time until June 21, 2028 and thereby increase the Company's share capital without further shareholder approval. After June 21, 2028 , 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, 2023, the Company is authorized to issue up to 1,500,000 new Class B Shares, corresponding to CHF 3,750,000 in par value. Since June 22, 2023, 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 289,410 Class B Shares has been issued out of the Company's conditional share capital as of December 31, 2023. As a result, the available conditional share capital of the Company, as at December 31, 2023, amounted to CHF 3,026,475, corresponding to the issuance of 1,210,590 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.

 

In connection with, an Agreement for the Issuance and Subscription of Convertible Notes WISeKey entered into with GLOBAL TECH OPPORTUNITIES 8, Grand Cayman, Cayman Islands ("GTO") on December 8, 2020, the Company granted GTO warrants 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 75 (the “GTO Warrant Exercise Price”). The number of warrants granted at each tranche subscription was calculated as 15% of the principal amount of each subscription divided by the GTO Warrant Exercise Price. Each warrant agreement has a 5-year exercise period starting on the relevant subscription date. As at December 31, 2023, a total of 26,383 warrants (the "GTO Warrants") have been issued 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 Warrants as at December 31, 2023 is 26,383 Class B Shares. The GTO Warrants may be exercised by GTO at any time until the fifth anniversary of their respective grant at the GTO Warrant Exercise Price. The Class B Shares issued to GTO in connection with the GTO Warrants 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 GTO Warrants will dilute the Company's shareholders' interests in the Company.

 

On 29 June 2021, WISeKey entered into an Agreement for the Subscription of up to $22M Convertible Notes (the “L1 Facility”) with L1 Capital Global Opportunities Master Fund (“L1”), as amended on September 27, 2021 and March 3, 2022, pursuant to which L1 committed to grant loans, in several tranches and in the form of convertible notes (the “L1 Convertible Notes”), to WISeKey up to a maximum amount of USD 22 million, subject to certain conditions, over a period of 24 months. The L1 Convertible Notes bear interest at a rate of 6% per annum (“L1 Interest”). Subject to a cash redemption right of WISeKey, the L1 Convertible Notes are mandatorily convertible into Class B Shares within a period of 24 months from issuance of the respective L1 Convertible Notes (the “L1 Conversion Period”), extendable under certain conditions by a maximum of 6 months (the “L1 Maximum Conversion Period”). Conversion takes place upon request by L1 during the L1 Conversion Period, but in any case no later than at the expiry of the L1 Maximum Conversion Period. The conversion price applied to the principal amount of the L1 Convertible Notes and accrued interest, converted into CHF at the relevant exchange rate will be (a) for the tranches subscribed under the original agreement, the lower of (i) 95% of the lowest volume weighted average price of Class B Shares on the SIX Swiss Exchange during the five trading days preceding the relevant conversion date and (ii) depending on the tranche, a fixed conversion price ranging from CHF 200 to CHF 375, and (b) for the tranches subscribed under the amendment dated September 27, 2021 and March 3, 2022, 90% of the lowest volume weighted average price of Class B Shares on the SIX Swiss Exchange during the ten trading days preceding the relevant conversion date. WISeKey made several loan subscriptions in 2021 and 2022 under the L1 Facility and there is no remaining amount available for loans as at December 31, 2023. In 2021, L1 requested to convert L1 Convertible Notes issued in 2021 for a total amount of USD 13.5 million, resulting in the issuance of 237,176 Class B Shares to L1. In 2022, L1 requested to convert L1 Convertible Notes issued in 2021 and 2022 for a total amount of USD 7.1 million, resulting in the issuance of 584,512 Class B Shares to L1. In 2023, L1 requested to convert L1 Convertible Notes issued in 2022 for a total amount of USD 1.2 million, resulting in the issuance of 145,975 Class B Shares to L1. The conversion of the subscriptions under the L1 Facility into Class B Shares will dilute the Company's shareholders' interest in the Company. L1 requested to convert some but not all L1 Convertible Notes issued in 2022. As at December 31, 2023, L1 Convertible Notes in an aggregate amount of USD 200,000 remained unconverted and there is no remaining amount available for loans, therefore, as at December 31, 2023, the estimated maximum number of Class B Shares deliverable under the L1 Facility is 74,074 Class B Shares at a conversion price of CHF 2.7 per Class B Share for the tranches subscribed under the amendment dated March 3, 2022 (calculated based on the closing price of a Class B Share on the SIX on December 29, 2023 of CHF 3 discounted by 10%). Note that the actual price at which L1 may convert each tranche under the L1 Facility is subject to change, and, therefore, the number of Class B Shares deliverable to L1 may vary.

 

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In connection with the L1 Facility, the Company granted L1 the option to acquire Class B Shares at an exercise price of the higher of (a) 1.5 times the 5-trading day volume-weighted average price of the WISeKey Class B Share (“WIHN Class B Share”) on the SIX Swiss Stock Exchange immediately preceding the tranche closing date and (b) CHF 250 (the “L1 Warrant Exercise Price”). The number of warrants granted at each tranche subscription is calculated as 25% of the principal amount of each tranche divided by the volume-weighted average price of the trading day immediately preceding the tranche closing date. Each warrant agreement has a 3-year exercise period starting on the relevant subscription date. As at December 31, 2023, a total of 159,807 warrants have been issued 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 L1 Warrants as at December 31, 2023 is 159,807 Class B Shares. The L1 Warrants may be exercised by L1 at any time until the third anniversary of their respective grant at the L1 Warrant Exercise Price.

 

On 29 June 2021, WISeKey entered into an Agreement for the Subscription of up to $22M Convertible Notes (the “Anson Facility”) with Anson Investments Master Fund LP (“Anson”), as amended on September 27, 2021, pursuant to which Anson committed to grant loans, in several tranches and in the form of convertible notes (the “Anson Convertible Notes”), to WISeKey up to a maximum amount of USD 22 million, subject to certain conditions, over a period of 24 months. The Anson Convertible Notes bear interest at a rate of 6% per annum (“Anson Interest”). Subject to a cash redemption right of WISeKey, the Anson Convertible Notes are mandatorily convertible into Class B Shares within a period of 24 months from issuance of the respective Anson Convertible Notes (the “Anson Conversion Period”), extendable under certain conditions by a maximum of 6 months (the “Anson Maximum Conversion Period”). Conversion takes place upon request by Anson during the Anson Conversion Period, but in any case no later than at the expiry of the Anson Maximum Conversion Period. The conversion price applied to the principal amount of the Anson Convertible Notes and accrued interest, converted into CHF at the relevant ex-change rate will be (a)  for the tranches subscribed under the original agreement, the lower of (i) 95% of the lowest volume weighted average price of Class B Shares on the SIX Swiss Exchange during the five trading days preceding the relevant conversion date and (ii), depending on the tranche, a fixed conversion price ranging from CHF 200 to CHF 375, and (b) for the tranches subscribed under the amendment dated September 27, 2021, 90% of the lowest volume weighted average price of Class B Shares on the SIX Swiss Exchange during the ten trading days preceding the relevant conversion date. WISeKey made several loan subscriptions in 2021 and 2023 under the Anson Facility. At the end of the official commitment period on June 28, 2023, the outstanding Anson Facility available was USD 2 million which management believes may be the subject of a later amendment. In 2021, Anson requested to convert Anson Convertible Notes issued in 2021 for a total amount of USD 9.8 million, resulting in the issuance of 164,565 Class B Shares to Anson. In 2022, Anson requested to convert Anson Convertible Notes issued in 2021 for a total amount of USD 6.7 million, resulting in the issuance of 287,033 Class B Shares to Anson. In 2023, Anson requested to convert Anson Convertible Notes issued in 2023 for a total amount of USD 3.5 million, resulting in the issuance of 558,213 Class B Shares to Anson. The conversion of the subscriptions under the Anson Facility into Class B Shares will dilute the Company's shareholders' interest in the Company. As at December 31, 2023, Anson had requested to convert all Anson Convertible Notes issued, therefore there is no unconverted Anson Convertible Notes. As at December 31, 2023, the remaining amount available for subscription by the Company under the Anson Facility is USD 2 million which management believes may be the subject of a later amendment. Therefore, as at December 31, 2023, the estimated maximum number of Class B Shares deliverable under the Anson Facility is 740,740 Class B Shares at a conversion price of CHF 2.7 per Class B Share for the tranches subscribed under the amendment dated September 27, 2021 (calculated based on the closing price of a Class B Share on the SIX on December 29, 2023 of CHF 3 discounted by 10%). Note that the actual price at which Anson may convert each tranche under the Anson Facility is subject to change, and, therefore, the number of Class B Shares deliverable to Anson may vary.

 

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In connection with the Anson Facility, the Company granted Anson the option to acquire Class B Shares at an exercise price of the higher of (a) 1.5 times the 5-trading day volume-weighted average price of the WIHN Class B Shares on the SIX Swiss Stock Exchange immediately preceding the tranche closing date and (b) CHF 250 (the “Anson Warrant Exercise Price”). The number of warrants granted at each tranche subscription is calculated as 25% of the principal amount of each tranche divided by the volume-weighted average price of the trading day immediately preceding the tranche closing date. Each warrant agreement has a 3-year exercise period starting on the relevant subscription date. As at December 31, 2023, a total of 128,841 warrants 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 Anson Warrants as at December 31, 2023 is 128,841 Class B Shares. The Anson Warrants may be exercised by Anson at any time until the third anniversary of their respective grant at the Anson Warrant Exercise Price. Should the remaining unsubscribed amount under the Anson Facility of USD 2 million be subscribed for, the estimated maximum number of warrants deliverable under the Anson Facility is 166,666 for the acquisition of an equal number of Class B Shares. As a result, assuming the Anson Facility is fully subscribed for, the maximum total number of Class B Shares that are issuable under the Anson Warrants as at December 31, 2023 is 295,507 Class B Shares. The Class B Shares issuable to Anson in connection with the Anson Warrants would be issued out of the Company's conditional share capital or capital band without triggering the pre-emptive rights of the existing shareholders of the Company. The exercise of the Anson Warrants will dilute the Company's shareholders' interests in the Company. Note that the actual volume-weighted average price of the trading day immediately preceding the subscription date at each subscription used to calculate the number of warrants granted to Anson is subject to change, and, therefore, the number of Class B Shares deliverable to Anson 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.

 

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, 2023, 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 96,165, 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.

 

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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;

 

·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.

 

We are a holding company with no direct cash generating operations and rely on our subsidiaries to provide us with funds necessary to pay dividends to shareholders.

 

We are a holding company with no significant assets other than the equity interests in our 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.

 

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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

 

Claims, Litigation, Government Investigations, and Other Proceedings May Adversely Affect Our Business and Results of Operations

 

We face a variety of potential claims, lawsuits, investigations, and other legal proceedings across different areas, such as intellectual property, taxes, labor, privacy, data security, consumer protection, commercial disputes, and more, involving both our own operations and those of third parties. These proceedings can negatively impact us due to legal expenses, disruption of operations, diversion of management attention, adverse publicity, and other factors. The outcomes of these matters are uncertain and come with significant risks. Assessing potential losses and establishing legal reserves involves judgment and may not fully capture all uncertainties and unpredictable outcomes. Until these matters are resolved, we may face losses beyond what is currently recorded, which could be significant. Changes or inaccuracies in our estimates and assumptions could materially affect our business or financial results.

 

Employment laws in some of the countries in which we operate are relatively stringent.

 

As of December 31, 2023, we had employees located in Switzerland, in the United States, in France and other countries and regions. In some of the countries in which we operate, employment laws may grant significant job protection to employees, including rights on termination of employment and setting maximum number of hours and days per week that a particular employee is permitted to work. In addition, in certain countries in which we operate, WISeKey is or may be required to consult and seek the advice of employee representatives and/or unions. These laws, coupled with the requirement to consult with any relevant employee representatives and unions, could impact our ability to react to market changes and the needs of our business.

 

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, that is opposed to by our Board. These provisions may also adversely affect prevailing market prices for our Class B Shares and our ADSs. Even in the absence of a takeover attempt, these provisions may adversely affect the market price of our common stock if they are viewed as discouraging takeover attempts. 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 June 21, 2028, to issue up to 1,618,117 new Class B Shares and to limit or withdraw the pre-emptive rights of existing shareholders in various circumstances;

 

·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;

 

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·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 0.25 per share) than our Class B Shares (CHF 2.50 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 CHF 2.50 per Class B Share as compared to CHF 0.25 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 4.7 million of our shares are issued (in line with the commercial register of the Canton of Zug as at December 31, 2023), of which approximately 1.6 million are Class A Shares and approximately 3.1 million are Class B Shares, the Class A Shares as a class contribute approximately 4.9% of the aggregate par value of the Company, have 34.2% 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 4.9% 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 4.7 million of our shares are issued, of which approximately 1.6 million are Class A Shares and approximately 3.1 million are Class B Shares, Class B Shares as a class contribute 95.1% of the aggregate par value of the Company, have 65.8% 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 95.1% 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.

 

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.

 

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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 one patent in Switzerland and another one is under evaluation, 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. We currently own 110 individual patents which preserve our technology.

 

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.

 

Our 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.

 

We may not achieve some or all of the expected benefits of the partial spin-off of SEALSQ Corp, and the partial spin-off of SEALSQ Corp may adversely affect our business.

 

SEALSQ Corp, previously a wholly owned subsidiary of WISeKey was incorporated under the laws of the British Virgin Islands in 2022. On January 1, 2023, WISeKey transferred the ownership to SEALSQ Corp of WISeKey Semiconductors SAS (formerly known as “VaultIC SAS”), a French semiconductor manufacturer and distributor, WISeKey IoT Japan KK, a Japan-based sales subsidiary of WISeKey Semiconductors SAS, and WISeKey Semiconductors, Taiwan Branch, a Taiwan- based sales and support branch of WISeKey Semiconductors SAS, in a share exchange for 7,501,400 of SEALSQ Corp ordinary shares and 1,499,700 of SEALSQ Corp Class F shares. WISeKey and SEALSQ Corp have executed the services agreement or agreements pursuant to which WISeKey makes available to SEALSQ Corp certain resources, including skilled staff, external consultants and advisors with knowledge across multiple domains, and provide services including, but not limited to, sales and marketing, accounting, finance, legal, taxation, business and strategy consulting, public relations, marketing, risk management, information technology and general management. WISeKey also makes available funding to SEALSQ Corp on the basis of an intra-group loan agreement.

 

On May 23, 2023, SEALSQ Corp was partially spun off (the “Spin-Off”) through the distribution of 20% of SEALSQ’s outstanding Ordinary Shares, to holders of WISeKey Class B Shares, including holders of WISeKey ADSs, and to holders of WISeKey Class A Shares, in each case as a partial spin-off distribution as a dividend in kind to such holders. On May 24, 2023, SEALSQ Corp listed its Ordinary Shares on the Nasdaq stock exchange under the ticker symbol “LAES”.

 

WISeKey continues to hold a controlling interest in SEALSQ Corp after the listing and, as such, the results and assets and liabilities of SEALSQ are consolidated in the consolidated financial statements of WISeKey. As a result, our financial performance is affected by the financial performance of SEALSQ Corp and by the risks and uncertainties that could materially adversely affect SEALSQ Corp’s business, operating results, financial condition or prospects.

 

The development of SEALSQ Corp is intrinsically linked to the commercial activity of WISeKey, more specifically of WISeKey Semiconductors SAS and its subsidiaries. SEALSQ Corp is particularly vulnerable - but not limited to – to all the business and supply risks related to the semiconductor industry, which could materially and adversely affect its financial stability.

 

We may not be able to achieve the full strategic and financial benefits expected to result from the Spin-Off, or such benefits may be delayed or not occur at all. The Spin-Off is expected to provide the following benefits, among others:

 

·permit each of the separate companies of the WISeKey Group to increase their strategic focus on their businesses as each company operates in a different market with different client profiles, opportunities and business models;

 

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·improve the resource allocation by the separate companies and permit each company to achieve more attractive financing terms as investors are better able to understand each stand-alone business.

 

We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

 

·the listing of securities issued by SEALSQ Corp in the U.S. markets requires significant amounts of management’s time and effort, which may divert management’s attention from our commercial strategies; and

 

·we and SEALSQ Corp have expended and will continue to expend significant management time and resources and have incurred and will continue to incur significant expenses due to legal and financial advisory and accounting services fees related to the Spin-Off.

 

If we fail to achieve some or all of the benefits expected to result from the Spin-Off, or if such benefits are delayed, our business, financial conditions and results of operations could be adversely affected.

 

We incorporated a wholly-owned subsidiary, WISeSat.Space AG, under the laws Zug, Switzerland.

 

WISeSat.Space AG is a wholly-owned subsidiary of WISeKey. The incorporation of WISeSat.Space AG undertakes to simplify our organizational structure for our activities related to space and satellites. Such reorganization could be disruptive to our business, result in significant expense, require regulatory approvals, and fail to result in the intended or expected benefits, any of which could adversely impact our business and results of operations.

 

WISeKey will have to correctly assess the business-needs in the fields of space and satellites to achieve profitability with WISeSat.Space AG, failing which could materially and adversely affect WISeKey by resulting in the loss of the assets invested in WISeSat.Space AG.

 

Risks Related to Our Shares and ADSs

 

As a “foreign private issuer” (within the meaning of the U.S. Securities Act) we are entitled to claim exemptions from certain Nasdaq corporate governance standards, and, as we elected to rely on these exemptions, you may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.

 

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 Class B 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.

 

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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.

 

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 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 Class B Shares and ADSs that are held by non-affiliates exceeds USD 700,000,000 as of the last day of our most recently-completed second fiscal quarter.

 

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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.

 

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

 

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.

 

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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.

 

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 Class B 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 Class B 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 Class B 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 Class B Shares. As a result, you may not be able to exercise your right to vote.

 

The depositary for our ADSs will vote the Class B Shares underlying your ADSs in accordance with the recommendations of our Board of Directors if you do not give timely voting instructions.

 

Under the deposit agreement for our ADSs, if the depositary does not receive timely ADS voting instructions from you, the depositary will deem you to have instructed the depositary to vote the Class B Shares underlying your ADSs at the shareholders’ meeting in accordance with the recommendations of our Board of Directors. As a result, 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 Class B 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 our ADSs, industry analysts in the United States have not published such research and reports in the United States about our Class B Shares or our ADSs. If securities or industry analysts continue not to provide 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 we were not a "passive foreign investment company," or PFIC, for U.S. federal income tax purposes for 2023, there can be no assurance in this regard, and there is risk that we will be a PFIC for 2024 and future taxable years. If we are a PFIC for any taxable 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. Passive income generally includes interest, dividends, rents, certain non-active royalties and capital gains. 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 2023 taxable year. However, based on our current ownership of SEALSQ Ordinary Shares, further dilution of our ownership of SEALSQ in 2024 may result in SEALSQ failing to qualify as a look-through subsidiary and being treated as a passive investment asset, which could cause us to be a PFIC for 2024. There can be no assurance that the Internal Revenue Service (the "IRS") will agree with our conclusion regarding our PFIC status for 2023, 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, including goodwill, is uncertain and may fluctuate significantly over time. Further, the determination of whether we are a PFIC is fact-intensive and can only be determined after the close of the taxable year applying principles and methodologies that in some circumstances are unclear and subject to varying interpretation. 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 the Item 10.E. Taxation section of this annual report titled "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 shares or 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.

 

On February 1, 2021, we acquired a controlling interest in arago GmbH and its affiliates, arago Da Vinci GmbH, arago Technology Solutions Private Ltd, and arago US Inc (together “arago” or the “arago Group”) through conversion of a CHF 5 million loan to arago into 51% of arago’s share capital carrying 51% of the voting rights. arago is a leading German technology company that provides Artificial Intelligence (“AI”) to enterprises globally through knowledge automation.

 

In the first half of 2022, WISeKey decided to sell arago in order to refocus on its core operations. On March 16, 2022, WISeKey entered into a Share Purchase and Transfer Agreement to sell its 51% ownership in the arago Group to OGARA GmbH, with Neutrino Energy Property GmbH & Co. acting as “Buyer Guarantor”. The sale was completed on June 24, 2022, when the shares owned by WISeKey in arago were transferred to OGARA GmbH as WISeKey issued a waiver to accept a delayed payment of the consideration.

 

On April 1, 2022, SEALSQ Corp (formerly known as SEAL (BVI) Corp.) was incorporated under the laws of the British Virgin Islands. SEALSQ Corp (“SEALSQ”) is currently a wholly owned subsidiary of WISeKey. SEALSQ Corp was incorporated by WISeKey to serve as the holding company of 2 subsidiaries and 1 branch (which currently represents WISeKey’s global semiconductor business). Pursuant to an internal restructuring of WISeKey on January 1, 2023, WISeKey transferred the ownership of WISeKey Semiconductors SAS (formerly known as VaultIC SAS), a French semiconductor manufacturer and distributor, WISeKey IoT Japan KK, a Japan-based sales subsidiary of WISeKey Semiconductors SAS, and WISeKey Semiconductors, Taiwan Branch, a Taiwan- based sales and support branch of WISeKey Semiconductors SAS, to SEALSQ Corp in a share exchange.

 

SEALSQ Corp filed a registration statement on Form F-1 pursuant to the Securities Act of 1933 with the U.S. Securities and Exchange Commission (“SEC”) to effect a partial spin-off of SEALSQ Corp currently a wholly-owned subsidiary that acts as the holding company for our semiconductor business. Such registration statement was declared effective by the SEC on March 29, 2023.

 

On April 27, 2023, WISeKey’s shareholders approved during an Extraordinary General Meeting to distribute 20% of SEALSQ’s outstanding Ordinary Shares, to holders of WISeKey Class B Shares, including holders of WISeKey ADSs, and to holders of WISeKey Class A Shares, in each case as a partial spin-off distribution as a dividend in kind to such holders.

 

On May 24, 2023, SEALSQ Corp listed its Ordinary Shares on the Nasdaq Global Market under the ticker symbol “LAES”. On October 4, 2023, SEALSQ transferred the listing of its Ordinary Shares from the Nasdaq Global Market to the Nasdaq Capital Market.

 

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On June 22, 2023, WISeKey’s shareholders approved the Board of Directors’ proposals to effect a 50:1 reverse stock split with respect to Class B Shares and a 25:1 reverse stock split with respect to the Class A Shares. As a result of the different reverse stock split ratios, the aggregate voting power of the Class A Shares has been increased relative to the aggregate voting power of the Class A Shares prior to the effectiveness of the reverse stock split. As a result of the reverse stock split of the Class B Shares and a subsequent reverse split of the ADSs on July 5, 2023, each ADS now represents one-half (1/2) of one Class B Share.

 

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

 

I. Our Semiconductor Vertical

 

a. Overview

 

WISeKey’s global semiconductor business is run through its subsidiary, SEALSQ.

 

The mission of SEALSQ is to pioneer the integration of digital trust into the physical world.

 

SEALSQ stands at the intersection of physical and cyber trust, offering unparalleled assurance in an increasingly interconnected world. At the heart of its offerings is the innovative integration of Cybersecurity, Semiconductors and Post-Quantum Internet of Things (“IoT”.) It is transforming technology, utilizing IoT-generated data, protected and authenticated by our innovative technology, to enable operational enhancements.

 

SEALSQ uses a unique method to secure semiconductors designed by the Company through cutting-edge authentication processes, combined with post-quantum technology and third-party identity blockchains, to ensure the authenticity of the original IoT.

 

SEALSQ uses a patented method to digitally certify the authenticity of a physical object of value. The method includes a storage device, a digital certificate of authenticity (encrypted information reflecting at least one characteristic unique to the physical object, checking, whenever required, the validity of the digital certificate of authenticity by use of a network computer), the network computer cooperating with the storage device and a validating or a certifying authority.

 

With a rich portfolio of 39 patent families, covering over 106 fundamental individual patents, and another 12 patents under review, SEALSQ continues to expand its platform use in various domains. SEALSQ semiconductors secure millions of objects: Luxury products, high-end watches, routers, gateways, utilities meters, drones, authentication dongles, storage memory USB sticks, medical devices, connected door-locks, and electronic consumers devices, among others. These semiconductors include Digital Identification technology, such as Keys, Certificates or NFTs, that secures, authenticates, and proves ownership of digital and tangible assets.

 

SEALSQ’s semiconductors, when placed on an object, can securely link the object to non-fungible tokens (“NFTs”), enabling authentication and tracking of the object. This model is much like an embedded ePassport, and confirms the identity of the object on the Blockchain ledger. This digital identity, used throughout the object’s lifetime, allows the object to become a “Trusted Object” of the Internet, and enables proof of its identity and provision of related verifiable data.

 

SEALSQ does not provide any technology or services in the management of the NFT creation or the distribution of NFTs. However, SEALSQ’s NFT-related business is to provide its security–related services, Secure Element, to customers in the form of security-enhanced semiconductors. The Secure Element service that SEALSQ provides enables SEALSQ’s customers to create and maintain a secure link between an object and its non-fungible token (“NFT”) (issued by a SEALSQ customer that purchases SEALSQ semiconductors) that is stored in a blockchain.

 

SEALSQ’s technology enables systems and methods for establishing the long-term authenticity of NFTs minted on a public blockchain by linking the NFT to its associated object (which itself may be physical, digital, tangible or intangible), the minter of the NFT, the nature of the association of the NFT minter to the associated physical object, and the possessor and/or originator of the object. In particular, SEALSQ’s technology enables the “embodiment” of this information that constitutes the linkage between the NFT and the associated digital object, physical object, or intangible object (e.g., intellectual property assets, contracts, or other intangible assets), and consequently allows for authentication of the NFT and its related object in a variety of scenarios.

 

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IoT Market

 

The significant growth of the IoT market, as reported by IoT Analytics,1 highlights the increasing significance of IoT in our digital world. Many of the currently deployed IoT devices lack any serious form of security. As such, these devices contain weaknesses that can easily be exploited, and the vast majority of data transmission to or from these devices is left unprotected. Regulatory and legislative pressure in combination with the rising danger of ransomware and other types of attacks, will force IoT customers to adopt solid cybersecurity practices and techniques.

 

Given the rapidly growing number of connected IoT devices and an increasing awareness of the need for robust security measures for these devices, the IoT cybersecurity market presents enormous potential: More than 12 billion IoT devices were connected in 2021 and this number is expected to grow to 29 billion units in 2027 with CAGR of 16% according to IoTAnalytics.2 McKinsey predicts an annual USD 12.6 trillion in economic value by 2030.3 Analysts expect the market of secure hardware to grow to more than 5 billion units in 2024,4 there are only a handful of suppliers in the world. ABI Research also forecasts that the global market size of secure hardware modules will grow from $0.8 billion in 2022 to $1.2 billion in 2026 at a CAGR of 10%.5

 

An increase in cyber threats targeting critical infrastructure systems is one reason ABI Research forecasts that Authentication IC (Integrated Circuit) will be at the center of IoT cybersecurity. ABI Research also anticipates that the global market size of the Authentication IC will grow from 0.3 billion in 2022 to 1 billion in 2026 at a CAGR of 57.1%.6

 

McKinsey7 listed a number of ‘head wind’ factors for IoT adoption rates. To cite some of their observations:

 

·“Consumers, enterprise customers, and governments are increasingly concerned with IoT cybersecurity because the growing number of connected endpoints offers vulnerable points for hackers to exploit.”

 

·“Companies are grappling with how much privacy customers will give up in return for lower prices or special offers in a retail setting. The COVID-19 pandemic has brought this issue into even sharper relief as governments and citizens attempt to balance public health with individual privacy.”

 

·“Cybersecurity is a cross-cutting headwind to at-scale IoT deployments, so it should be unsurprising that this concern is particularly pronounced in the healthcare space. Not only is the security of the IoT device itself paramount but also that of the underlying data and analytics.”

 

Markets and Markets forecasts the global IoT cybersecurity market size to grow from $14.9 billion in 2021 to $40.3 billion by 2026, at a CAGR of 22.1% from 2021 to 2026.8

 

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1 “State of IoT 2023”, IOT Analytics, May 2023

2 “State of IoT 2023”, IOT Analytics, May 2023

3 “IoT value set to accelerate through 2030”, McKinsey, November 2021

4 “Digital Authentication and Embedded Security”, ABI Research, February 2020

5 “Hardware Security Modules”, ABI Research, January 2022

6 “Embedded Security for the IoT”, ABI Research, January March 2020.

7 “The Internet of Things: Catching up to an accelerating Opportunity”, McKinsey & Company, November 2021

8 “IoT Security Market by Type (Network Security, Endpoint Security, Application Security and Cloud Security), Component (Solutions & Services), Application Area, Deployment Mode (On-premises & Cloud), Organization Size, and Region – Global Forecast to 2026”, Markets And Markets, October 2021

 

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Allied Market Research valued the global IoT security market size at $8.4 billion in 2018 and projected the size to reach $74 billion million by 2026, growing at a CAGR of 31.20% from 2019 to 2026.9

 

The IoT market has so far been self-regulated, and some industries are implementing sector-specific regulations. Governments, however, are increasingly aware of the cybersecurity risks of IoT that can leave citizens vulnerable to security and privacy risks. Lawmakers enact legislation to:

 

·Make connected devices more resilient to cyber threats and attacks (IoT Cybersecurity); and

 

·Protect the privacy of personal information (IoT Privacy).

 

Aspects of an IoT deployment may then be subject to many different forms of oversight.

 

As governments are adopting new legislation imposing security implementation requirements on IoT deployments, IoT devices and IoT deployments may no longer be able to comply with new and future legislation and regulations without implementing new levels of cybersecurity features.

 

Gartner expects that through 2026, less than 30% of U.S. critical infrastructure owners and operators will meet newly mandated government security requirements for cyber-physical systems.10 Gartner further expects that the percentage of nation states passing legislation to regulate ransomware payments, fines and negotiations will rise to 30% by the end of 2025, compared to less than 1% in 2021.11

 

Gartner also forecasts that, by 2025, 70% of CEOs will mandate a culture of organizational resilience to survive coincident threats from cybercrime, severe weather events, civil unrest and political instabilities.12

 

IoT Cybersecurity

 

Regarding critical infrastructure protection, regulators and legislators are increasingly concerned about security of IoT actuators in crowded places, power grids, telecom systems, public transport, traffic control, water distribution, and energy transport.

 

The EU Cybersecurity Act that came in effect in 2019, addresses these concerns and applies in all EU member states and the UK. It mandates the EU Agency for Network & Information Security (“ENISA”) to define an EU-wide cybersecurity certification framework.

 

The EU further enacted the Directive on security of network and information systems (“NIS”). It aims to reach a high level of cybersecurity for Critical National Infrastructure and essential services, and establishes a range of IoT cybersecurity requirements for operators of essential services and their digital service providers.

 

The U.S. currently lacks a federal IoT cybersecurity regulatory framework. The IoT Cybersecurity Improvement Act passed in 2020, however, sets minimum security standards for IoT devices procured by the federal government. While the bill avoids to directly regulate the private sector, it aims to leverage federal government procurement influence to encourage increased cybersecurity and put in place basic security measures for IoT devices. The bill further gives the National Institute of Standards & Technology (“NIST”), the authority to oversee IoT cybersecurity risks for equipment bought by the federal government, and to issue guidelines dealing with IoT cybersecurity. IoT devices procured by the federal government must comply with these recommendations.

 

______________________________

9 “IoT Security Market by Component Solution (Solution and Services), Deployment Model (On-Premise and Cloud), Organization Size (Large Enterprises and Small & Medium Enterprises), Product Type (Device Authentication & Management, Identity Access & Management, Intrusion Detection System & Intrusion Prevention System, Data Encryption & Tokenization and Others), Security Type (Network Security, Endpoint Security, Application Security, Cloud Security, and Others), and Industry Vertical (Manufacturing, Retail & E-Commerce, Government & Defense, Transportation & Logistics, Energy & Utilities, Healthcare & Others); Global Opportunity Analysis and Industry Forecast, 2019-2026, Allied Market Research, January 2020

10 “3 Planning Assumptions for Securing Cyber-Physical Systems of Critical Infrastructure”, Gartner, February 2022

11 Opening Keynote, “Gartner Security & Risk Management Summit” in Sydney, Australia, Gartner, June 2022

12 Opening Keynote, “Gartner Security & Risk Management Summit” in Sydney, Australia, Gartner, June 2022

 

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At the state level, California and Oregon have gone further and passed new IoT security laws (resp. SB 327 and HB-2395) that became effective in 2020. These laws require that IoT devices sold in California and Oregon be fitted with reasonable security features to protect both the IoT device and the data it contains. They further place liability and burden of proof on the IoT vendors as soon as the device is connected to the Internet in those states.

 

New York State enacted the Stop Hacks and Improve Electronic Data Security Act (“SHIELD”) in 2020. This bill requires the implementation of a cybersecurity program and protective measures for New York State residents and apply to IoT manufacturers.

 

The UK is currently moving forward and is shifting the responsibility to secure IoT devices away from consumers and demand strong cybersecurity be built-in by design.

 

ABI Research expects Critical Infrastructure cybersecurity spending to increase from $106 billion in 2021 to $146 billion in 2025 at a CAGR of 8.3%.13

 

IoT Privacy

 

Regarding privacy, regulators and legislators are increasingly concerned that individuals may not be able to provide consent for IoT sensors which are permanently collecting behavioral data, to locate the source of inaccurate data, and to be comfortable that uploaded privacy-sensitive data do not leak out.

 

The EU General Data Protection Regulation (“GDPR”), which has been in effect since 2018, establishes a harmonized framework within the EU and the UK, including the right to be forgotten, the need for clear and affirmative consent, and severe penalties for failure to comply with these rules. The GDPR law equally applies to IoT devices, IoT platforms and IoT deployments.

 

The U.S. currently lacks a comprehensive federal law regulating the collection and use of personal information beyond the U.S. Privacy Act of 1974 and the Children’s Online Privacy Protection Act. Several states, however, have recently passed new legislation to take digital privacy into account.

 

The California Consumer Privacy Act (“CCPA”), which has been in effect since 2020, enhances privacy rights and consumer protection for residents of California. The California Privacy Rights Act (“CPRA”) supplements the CCPA and took effect on January 1, 2023. It creates a new category of personal information named sensitive personal information. Biometric data, including facial recognition and other data that may yield details about race, ethnicity, sexual orientation, religious beliefs, and geolocation, are included in this new category of sensitive personal information and must be adhered to by IoT devices, IoT platforms and IoT deployments.

 

Gartner expects that by the end of 2023, modern privacy laws will cover the personal information of 75% of the world’s population.14

 

Trusted IoT

 

The Trusted Internet of Things, or IoT, is poised to disrupt the semiconductor industry at industrial and business levels. IoT devices transform almost all products into smart devices, from irrigation systems to luxury products to pharma and clothing. Retail, health, bioscience, consumer-based products, and industrial IoT are all in high demand.

 

With the growing demand for IoT solutions comes tremendous potential for profit. The McKinsey Global Institute estimates that IoT applications will generate between $5.5 trillion and $12.6 trillion globally in 2030.15 This growth presents enormous opportunities and challenges for the semiconductor industry.

 

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13 “Critical Infrastructure Security”, ABI Research, February 2021

14 “Gartner Identifies Top Five Trends In Privacy Through 2024”, Gartner, May 2022

15 “The Internet of Things: Catching up to an Accelerating Opportunity”, McKinsey Global Institute, November 2021

 

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Perhaps the biggest challenge facing the semiconductors industry is that IoT chips will change the kinds of semiconductors the industry has to make, demanding new manufacturing processes and techniques from chip manufacturers to produce smaller chips that consume less power.

 

Sustainability

 

IoT will continue to transform the sustainable energy markets, such as wind, solar, biothermal, and nuclear power generation industries. IoT analytics will provide wind energy suppliers with real-time data on their power plants and storage assets, as well as their customers’ consumption, to ensure continuous energy generation and distribution. IoT solutions can also enable the adjustment of business operations for dramatically increased revenue.

 

There is an expectation to see a shift in demand for sensors, actuators, and gateways, because all of these devices are needed to predict failures and assure the overall efficiency of equipment, specifically for sustainable power generation. This trend is the most accurate for green technology companies that will continue to reduce operational expenses, reserve funds for innovations, and deliver more affordable green energy.

 

While IoT adoption from Utility Service Providers (“USPs”) will be driven by regional stimulus packages, markets will continue to be cautious with their capital spending on new technology solutions. USPs (energy and water) will remain one of the largest adopters of massive IoT solutions, as they continue to implement their grid digitalization programs that started more than a decade ago. A utility’s primary objective in implementing IoT will be to add resilience to their operational processes and support growing demands to shift from the use of fossil fuels and move toward renewable resources.

 

Oil & Gas operators realize they need to transform and embrace climate neutral energy sources. These operators will increase investments in digital transformation to address commercial, operational, and existential threats, as well as align business models with changing climate action regulation. ABI Research expects that, in 2030, they will spend $15.6 billion on digital tools to address industry challenges and align operations with changing business models.16

 

With digital tools, oil and gas companies can analyze the condition of transmission and distribution pipes, prepare for changes in oil and gas prices, plan sustainability strategies and ensure an increasing amount of renewables capacity is integrated into grids and provided to consumers. Data analytics allied with IoT platforms have become essential to identifying issues ahead of time such as pipeline degradation, wellhead performance, and pollution from gas flares.

 

The effect of the cyber-attack on the Colonial Pipeline made operators aware that even spending unlimited amounts to secure networks and assets will not provide 100 percent security as attackers only need one error to cause havoc. Increasingly, cyber threats are rapidly becoming a concern for both the C-suite and governments, and IoT cybersecurity has become a top priority for them.

 

ABI Research expects that spending on IoT security within the sector will increase by 8.1% between 2022 and 2030 to reach $5.6 billion per annum.17

 

Metaverse

 

Gartner expects that by 2026, 25% of people will spend at least one hour a day in the Metaverse for work, shopping, education, and entertainment.18 Gartner defines the Metaverse as a collective virtual open space, created by the convergence of virtually enhanced physical and digital reality. Beyond entertainment, gaming and social media, a Metaverse provides enhanced immersive experiences for professional activities including:

 

·Training with a more immersive learning experience in medical, industrial and sports.

 

·Virtual events with a more immersive social experience.

 

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16 “Digital Transformation in the Oil and Gas Market”, ABI Research, December 2021

17 “Digital Transformation in the Oil and Gas Market”, ABI Research, December 2021

18 “Predicts 2022: 4 Technology Bets for Building the Digital Future”, Gartner, December 2021

 

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·Retail can extend its reach to an immersive shopping experience that allows for more complex products.

 

·Enterprises can achieve better engagement, collaboration and connection with their employees through virtually augmented workspaces.

 

The current siloed VR (Virtual Reality) or AR (Augmented Reality) environments of a single provider will eventually integrate into a single Metaverse adopting open standards. Activities in a unified Metaverse include:

 

·Obtaining outfits, equipment and accessories for online avatars.

 

·Purchasing digital land and constructing virtual buildings.

 

·Participating in virtual events and training classes.

 

·Trading collectibles, rare assets and unique pieces of digital art.

 

·Interacting with others for employee onboarding, customer service, and sales.

 

Studies by, amongst others, Gartner19 and ITU20 revealed that consumers and professionals raise the following concerns before adopting the Metaverse:

 

·How to preserve the privacy of personal data.

 

·How to know whether data for decisions can be relied on.

 

·How to get confidence in payment methods.

 

·How to know for sure who you are interacting with.

 

·How to deal with the abundance of endpoints: Each device in the office or in someone’s home that connects to the internet opens up a new door through which cyberattacks can enter.

 

Since the Metaverse will require multiple devices and sensors, people are becoming even more vulnerable to data breaches. While the opportunities offered by the Metaverse are huge, these key concerns need to be solved first in order to create a “trusted” Metaverse. A trusted Metaverse enriches digital experiences with trusted bridges to the physical world.

 

Market Opportunity

 

SEALSQ’s business strategy focuses on expanding our product range, growing its global customer base, leveraging partnerships, and deepening penetration in existing markets. This strategy is underpinned by SEALSQ’s commitment to innovation, particularly in the development of next-generation Secure Elements and Crypto Processors capable of running Post-Quantum algorithms.

 

SEALSQ’s IoT systems, encompassing both cloud-based and edge-based solutions, cater to diverse operational needs. SEALSQ’s IoT solutions are making significant impacts across industries, including smart cities, healthcare, and cybersecurity.

 

SEALSQ’s solution

 

SEALSQ is so much more than a cybersecurity technology company.

 

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19 “What Is a Metaverse”, Gartner, January 2022

20 “AI: The driving force behind the metaverse”, ITU News, June 2022

 

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SEALSQ is in the physical/cyber trust business. Every day, citizens, consumers and professionals rely on the trust SEALSQ bring to the IoT devices around them. SEALSQ’s brand reflects digital comfort and a culture of trust, security, and protection.

 

For that, SEALSQ offers to its customers:

 

·“Secure Elements” implementing a mix of analog and digital countermeasures which are the DNA of its engineering teams, constantly monitoring and anticipating the new generation of attacks that the cyber hackers may develop.

 

·“Intelligent Provisioning and Personalization Platform” to manage the creation of digital keys and certificates. This approach ensures a more efficient, secure, and error-free process, significantly enhancing the reliability of certificate injection into SEALSQ’s Secure Elements. The intelligent system dynamically adapts to evolving security needs, providing personalized security solutions tailored to each customer's unique requirements.

 

·“Root Certificate Authority” to guarantee the uniqueness and authenticity of the digital identities SEALSQ generates for its customers. SEALSQ’s verification process detects anomalies and ensures the integrity of each digital identity, thereby fortifying the trust in our digital certificates.

 

SEALSQ’s products and infrastructures are certified with the highest grading of the industry by third party certification labs.

 

SEALSQ designs, develops and markets secure semiconductors worldwide as a fabless manufacturer, meaning it does not manufacture the semiconductors, but instead collaborates with production partners for all phases of the manufacturing process of its semiconductors/ICs, including wafer fabrication and packaging and testing. SEALSQ provides added security and authentication layers on its semiconductors which can be tailored to customers’ needs.

 

SEALSQ’s production partners are responsible for the procurement of all of the raw materials used in manufacturing its products and it understands that such raw materials are multi-sourced.

 

How is SEALSQ different?

 

SEALSQ is unique because it combines secure hardware with a platform to manage keys and to manage the physical/cyber pairing. This pairing associates the hardware chip inseparably with digital certificates and a digital record that reflects the lifecycle of the chip. Conversely, the digital security is anchored in hardware inside the device. It is this unique proposition that enables SEALSQ to bring digital trust to the physical world.

 

SEALSQ’s legacy of personalizing payment cards brought SEALSQ the opportunity to personalize IoT devices. While the market of payment cards and SIM cards has become a commodity, the market of personalized IoT devices is growing rapidly. With SEALSQ’s advanced management platform in combination with its advanced silicon design, SEALSQ can capture this booming market. SEALSQ’s efficient platform also enables to extend to mainstream quantities of non-connected objects, such as e-cigarettes, as well as small batches of high-end controllers, such as satellites placed into orbit.

 

As such, SEALSQ’s offers provenance, proof of origin, and lifecycle management to devices and objects. Additionally, SEALSQ enables data collection and data transmission to be protected against interference and eavesdropping, and SEALSQ enables command execution and firmware updates to be reliable and trustworthy.

 

SEALSQ’s diverse client base employs its solutions across a broad spectrum of applications. These range from securing artworks, medical supplies, and access tokens, to safeguarding advanced technology such as personal health monitors, industrial controllers, IT servers, and more. SEALSQ’s products play a crucial role in combating counterfeit, unauthorized imports, and theft, while ensuring the safety of connected devices in remote and unmonitored environments from threats like manipulation, disruption, and data breaches.

 

Benefits for Customers

 

Security is in our DNA, and SEALSQ helps its direct customers and end customers to understand the security risks, security implications and security solutions. SEALSQ’s platform takes away the burden of managing sophisticated cryptography and a suite of secret, private and public keys. And, SEALSQ helps them through the lifecycle of the security elements.

 

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EALSQ’s customers realize that their products have a clear differentiator to end customers when SEALSQ security is inside. SEALSQ provides them with an effective anchor from which trust can be established, and from which new supporting platforms and services such as device life cycle management can be supported.

 

Vendors typically find it hard to manage security and may have little in-house knowledge about cryptographic strength, key generation, key injection, key pairing, key rotation, key hierarchies, and key lifecycle. We fundamentally offer our customers a one-stop shop for trusted personalization of their devices.

 

Not only security, but also customer care is in our DNA. We are proud of the customer loyalty we have achieved over the past 20 years. Our customers and their end customers also appreciate that our product roadmap takes their input into account, as well as market trends and security trends. Moreover, involving partners in our roadmap, such as FOSSA and Parrot, help our mutual customers to tune their devices and deployments to tackle the cybersecurity challenges. Customers and end customers further appreciate that we understand and respond to specific regulations they may be subject to.

 

SEALSQ was able to clearly demonstrate its customer dedication in 2021. Since 2020, global semiconductor supply was under stress as a by-product of the COVID-19 pandemic. When economies started to rebound in 2021, the combination of supply chain logistics issues and shortages in raw material kept global semiconductor supply under stress. Dedicated to fulfilling customer demand, SEALSQ was able to secure large allocations in its supply chain. In fact, SEALSQ gained new customers thanks to the constrained delivery these customers faced by their former semiconductor suppliers. Customers openly praised SEALSQ’s dedication and loyalty to its customers.

 

Benefits for IoT owners and operators

 

While SEALSQ’s customers are typically product manufacturers, the end customers are factories, consumers, governmental infrastructures, municipalities, smart transport initiatives, smart agriculture, etc. Due to increased threats and attacks, these IoT owners and operators demand increasing levels of protection. And given that they increasingly install devices in unmanned and uncontrolled environments, they even demand the security to be physically tamperproof.

 

Further, with emerging policy debate and regulation on the topic of IoT security in Europe, Asia, and North America, IoT owners and operators want security solutions that can be easily implemented and deployed. With SEALSQ security inside, they know that digital trust is anchored in the hardware of the device.

 

When the U.S. government enacted its Infrastructure Investment and Jobs Act, SEALSQ was approached by integrators that worry about security and privacy. These integrators were seeking to participate in funded megaprojects to deploy IoT for power infrastructure, water distribution, airports, road safety, high speed internet and sensors to address climate change and saw that the level of cybersecurity of their IoT vendors was not always what they expected before SEALSQ came in the picture.

 

In 2023, SEALSQ reinforced its position as a unique security compliance provider for IoT device makers, delivering fully integrated security solutions from accredited root-of-trust to secure chip: costs and simplicity are optimized with no intermediates in the value chain, and the product gets to market earlier thanks to shorter development and certification processes.

 

SEALSQ sells into all industries and to companies of varying sizes, both vendors of appliances and end customers. Since 2010, it has sold more than 1 billion semiconductors and it has customers that bought more than 100 million of our high-end semiconductors. In the year ended December 31, 2023, SEALSQ’s top ten customers represented 90% of its revenue. As of December 31, 2023, SEALSQ has sold to over 175 customers in over 35 countries since 2016.

 

SEALSQ’s Competitive Strengths

 

SEALSQ believes that it has several competitive advantages that will enable it to maintain and extend its market position. Its key competitive strengths include:

 

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·Customer dedication is in its DNA and SEALSQ delivers to customers ordering hundreds of millions of units, as well as to customers ordering a few thousand custom units.

 

·Ongoing product innovation. SEALSQ constantly innovates on its products to enhance and expand capabilities. SEALSQ's agentless technology differentiates it in the market and positions it to capitalize on the proliferation of new device types entering the enterprise that cannot be supported by agent-based technologies.

 

·Proven Supply Chain Management processes with a track record of timely delivery.

 

·Standardized technology and compliance with industry-driven standards, to ease the integration by SEALSQ's direct customers and by end customers.

 

·Top-level certifications (Common Criteria EAL5+ and FIPS140-2 Level 3) that address the current and future requirements of IoT deployments in health care and critical infrastructure.

 

·The digital certificates are rooted at the OISTE Foundation, a not-for-profit organization based in Geneva, Switzerland, regulated by article 80 et seq. of the Swiss Civil Code and neutral vis-à-vis any dominant vendor, country or other market player.

 

·Broad appeal of its products across a diverse end customer base. SEALSQ serves end customers of all sizes across diverse industries. It is deeply integrated into its customers’ security infrastructure, demonstrating immediate and ongoing value. SEALSQ has a long-term, loyal base of end customers with many relationships spanning over 10 years.

 

·Recognized market leadership. SEALSQ is invited to speak at Davos and TechAccord. It participates in standardization efforts by Wi-SUN Alliance, a global association to drive interoperability in smart cities and smart grids. SEALSQ is also currently working with NIST’s National Cybersecurity Center of Excellence (“NCCoE”) on a reference design for securely onboarding IoT devices.

 

·Global market reach driven by direct and indirect sales strategy. SEALSQ has recruited top sales talent from leading security organizations and retain the highest quality sales representatives with demonstrated success.

 

·Strong leadership team of security experts. SEALSQ has a deep bench of talent at the executive level, with years of industry experience at semiconductor manufacturers and cryptography laboratories.

 

SEALSQ's Growth Strategies

 

While SEALSQ has traditionally relied on the one-time sale of semiconductors and sensor hardware, it is actively evolving its business model to embrace recurring revenue streams. This strategic shift aims to leverage a percentage of the vast install-base of over 1.6 billion semiconductors. In addition, SEALSQ has established a post-market segment focusing on provisioning, onboarding, and lifecycle management, which not only generates additional recurring revenue but also enhances customer loyalty and retention.

 

SEALSQ's growth strategies are multi-faceted and forward-looking, focusing on:

 

1.Product Innovation: SEALSSQ is at the forefront of developing a new generation of Secure Elements, incorporating cutting-edge technologies to minimize footprint and reduce costs. This includes advanced Flash memory for greater customization and a new generation of Crypto Processors capable of running Post-Quantum algorithms endorsed by NIST. These innovations are aimed at creating new opportunities in upgrade markets across various sectors and pioneering applications.

 

2.Global Customer Base Expansion: Significant investments have been made, and will continue, in SEALSQ’s sales infrastructure to foster new customer acquisition and to introduce its products in emerging markets. SEALSQ is confident these efforts will open doors to new large enterprise opportunities, both domestically and internationally.

 

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3.Leveraging Partnerships: By capitalizing on its robust ecosystem of technology and channel partners, SEALSQ aims to amplify its market presence. This strategy is particularly targeted towards mid-market enterprises, where it sees substantial growth potential.

 

4.Expanding Within Existing Customer Networks: SEALSQ’s revenue is intrinsically linked to its clients' sales volumes. By supporting its existing customers in capturing their market opportunities, SEALSQ not only grows alongside them but also expands its reach within their networks. This includes entering new segments of their operations and replacing competitors where possible, thereby broadening the application of SEALSQ's products in diverse IoT markets.

 

In summary, the business strategy at SEALSQ is dynamic and adaptable, focused on innovative product development, expanding its global reach, leveraging strategic partnerships, and deepening its engagement with existing clients. This approach positions SEALSQ to capitalize on the rapidly evolving IoT market, ensuring sustained growth and continued leadership in the field.

 

b. Product Updates

 

1.New Secure Elements

 

SEALSQ put to market two new Secure Elements in Q3 and Q4 2023:

 

·The VaultIC292™, a new secure element specifically designed for IoT devices and sensors.

 

The core of the value proposition is that this Secure Element can be pre-provisioned from factory or over-the-air, at wafer level or on package, with private keys and X509 certificates compliant with protocols such as MATTER, Wi-SUN or OPC for seamless authentication as well as commissioning with Microsoft AZURE or AWS Clouds.

 

On the Hardware side theVaultIC292 is built on a proven proprietary CCEAL4+ level Tamper Resistant platform that has been long used to secure many sensitive applications like National ID cards, e-Passports, Banking, Pay TV Access Control cards and IoT.

 

·The VaultIC408™, a new Secure Element specifically designed to enhance the security and protect user’s data in highly sensitive IoT applications like Smart Meters, Electric Vehicle Chargers, Medical Devices and Industrial IoT components.

 

The key aspect of the product value proposition is its certification level as the chip offers a tamper resistant CCEAL5+ certified hardware platform, running a FIPS 140.3 certified firmware, and offering off-the-shelf compliance with one of NIST’s most rigorous cryptographic standards.

 

2.Certificate and Key Management SaaS platform INeS™

 

SEALSQ also made significant product developments on the side of its Certificate and Key Management SaaS platform INeS™

 

·Product Attestation Authority

 

At the end of 2022, the WISeKey group’s Root-of-Trust was accredited as a Product Attestation Authority by the Connectivity Standards Alliance defining the “Matter” smart home standard. SEALSQ has made the necessary integration so that INeS has become able to issue and manage Device Attestation Certificates (DAC) that can be used directly by OEMs or pre-loaded into the VaultIC292/408 chips to enable immediate compliance of the device with the latest Matter 1.2 protocol.

 

This will enable smart home device and gateway manufacturers to get access to “Matter” standard compliance and ensure their products meet with the highest cyber security standards, all under a very short time to market, reducing costs and development complexity.

 

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·Zero-Touch provisioning Solution.

 

Manual provisioning of IoT devices today requires scheduling an appointment at the customer location for a field technician to manually set up the IoT devices.

 

Zero Touch provisioning (“ZTP”) is an automatic and secure way to onboard devices in any IoT cloud platform that uses X.509 authentication technology. It supports X. 509 standard as the format of public-key certificates and so any platform supporting it, is compatible with this service. Amazon Web Services (“AWS”), Microsoft Azure are some example platforms fully supported by ZTP.

 

3.Trust Services

 

SEALSQ has improved its Trust Services portfolio with the launch in Q4 2023 of a cutting-edge semiconductor personalization “on-package” service available for the whole VaultIC™ range.

 

The core of SEALSQ’s value proposition is to be a vertically integrated security offering. It means that in practice that its secure element range can be personalized by pre-loading private keys and certificates compliant with protocols such as MATTER, Wi-SUN or OPC for seamless authentication as well as commissioning with Microsoft AZURE or AWS Clouds.

 

Chip personalization is traditionally performed in the semiconductor industry at an early stage of the production process (called personalization “on wafer”), resulting in high minimum order volumes and long lead-times (often over 6 months) for personalized chips orders.

 

SEALSQ is now able to offer its clients the option to personalize off-the-shelf secure elements from its VaultIC™ range with certificates and keys and deliver the pre-loaded chips in less than 4 weeks packed in reels from 1,000 to 20,000 units.

 

4.QUASARS Program Update

 

In 2022, SEALSQ announced the kick-off of the QUASARS (QUAntum resistant Secure ARchitectureS) project, its next generation of secure microcontrollers built on its new Secure RISC-V CPU. In December 2023, the development reached a critical step, with the delivery of an FPGA (an emulator chip).

 

SEALSQ’s new secure microcontroller design is expected to be completed in Q2 2024, and the first engineering samples are expected in Q4 2024.

 

This project marks a significant leap into the Post-Quantum Cryptography era, as it will implement a “hybrid solution” (i.e., combining “traditional” cryptographic algorithms such as ECC and RSA, as well as “Post-Quantum” algorithms) that aligns with the recommendations of France's National Cybersecurity Agency (“ANSSI”). The French SCS Cluster's endorsement of our QUASARS project further underscores SEALSQ’s leading role in semiconductor innovation.

 

Post-quantum cryptography (“PQC”) refers to cryptographic methods that are secure against an attack by a quantum computer. As quantum computers become more powerful, they may be able to break many of the cryptographic methods that are currently used to protect sensitive information, such as Rivest-Shamir-Aelman (“RSA”) and Elliptic Curve Cryptography (“ECC”). PQC aims to develop new cryptographic methods that are secure against quantum attacks. One example of a post-quantum technology is lattice-based cryptography. It is a type of public-key cryptography that is based on the hardness of a mathematical problem called the Shortest Vector Problem (“SVP”) which is thought to be too difficult for a quantum computer to solve. Lattice-based cryptography can be used for tasks such as digital signatures, key exchange, and encryption. Another example is code-based cryptography which is based on the difficulty of decoding certain algebraic structures called error-correcting codes. These codes can be used to create digital signatures, key exchanges, and encryption schemes that are secure against quantum attacks.

 

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This post-quantum cryptography toolbox will help to protect against the security threat posed by quantum computers, allowing hybrid solutions by no later than 2025 as recommended by the French ANSSI. In addition to this, SEALSQ plans to upgrade its PKI offer, adding new post-quantum features for the IoT market: Secure authentication, Brand protection, Network communications, future FIDO (“Fast Identity Online”) evolutions and additional generally web-connected smart devices that obtain, analyze, and process the data collected from their surroundings. SEALSQ is executing this project under the name “QUASAR”.

 

c. New Uses Cases and Market Opportunities

 

1.Consumer IoT

 

Recently the FCC announced the “U.S. Cyber Trust Mark” initiative, a voluntary labeling program to increase product security awareness of consumer Internet of Things (IoT) based on NIST IR 8425. A little earlier, the European Commission leveraged on ETSI EN 303 645 to propose the EU Cyber Resilience Act with similar objectives.

 

In parallel a growing number of consumer IoT players gather around interoperability standards like Matter for Smart Home devices.

 

Both industry standards and national security labels require that IoT devices securely embed a unique trusted identity in the shape of certificates and private keys, as a cornerstone to the IoT security framework. IoT Device makers therefore consider compliance to these standards and their security requirements as a key part of their product development and launch plans.

 

In 2023 SEALSQ reinforced its positioning as a unique security compliance provider for IoT device makers, delivering fully integrated security solutions from accredited root-of-trust to secure chip: costs and simplicity are optimized with no intermediates in the value chain, and the product gets to market earlier thanks to shorter development and certification processes.

 

SEALSQ’s PKI as-a-Service (“INeS”) comes with a convenient online interface and a flexible range of pre-provisioning options (e.g., Factory, Over the Air, Zero Touch). It leverages the WISeKey root-of-trust that is now Matter PAA accredited while the secure elements range, enriched with 2 news products, provides up to FIPS 140-3 certification level to Consumer IoT product with State-of-the-Art CCEAL5+ tamper resistant hardware.

 

SEALSQ consumer electronics tab-2

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2.Electrical Vehicles Charging

 

The installed base of Electric Vehicle (EV) charging points is set to hit 22.8 million in 2025 according to estimates from research firm Berg Insight, which sees the market in Europe and North America dominated by private charging points. Uptake of electric vehicles is driving the trend and the Berg Insight firm expects approximately 1.8 million units to shipped in North America and Europe in 2025. Of these, the Berg Insight firm expects the number of connected charging points in the two regions to reach 7.9 million in 2025.21

 

According to the IHS Markit’s EV charging infrastructure forecast, the global deployment of EV charging stations will increase at a 31% CAGR to more than 66 million units by 2030.22 An important number of vulnerabilities have been identified, posing significant threats to not just the vehicles, but also to the charging stations, charge point operators, billing and distribution system operators. Threats are multifaceted, encompassing potential electricity flow disruption, identity theft, data alteration, and malware intrusion.

 

Beyond security concerns, a compelling EV charging experience requires seamless interoperability as consumers demand an automated and efficient charging process that doesn't involve lags or reentering credentials.

 

The industry’s response is the upgraded Plug & Charge ISO15118 standard that all charging stations and vehicles will need to support in the near future.

 

“Plug and Charge” is a technological concept initially introduced by ISO 15118, the international standard for charging electric vehicles (“EVs”) to enable a more user-convenient and secure way of charging EVs. All charging stations will need to support this standard in the near future, which is applicable to both wired (AC and DC charging) and wireless charging use cases.

 

From a security standpoint, Plug & Charge process requires the EV and charging station to establish and share a secure communication link. Several actions are from both sides to ensure confidentiality, data integrity, and authenticity. In practice, ISO 15118 specifies a set of symmetric and asymmetric cryptographic algorithms that secure the necessary level of confidentiality and verify both the integrity and the authenticity of the data exchanged.

 

SEALSQ’s solution to achieve compliance with ISO15118 perfectly and seamlessly integrates PKI, Certified Semiconductors and Provisioning Services in a single vertical security offering:

 

·Ready-to-use Secure Element personalized with a unique and universally trusted Digital Identity (ISO15118 compliance).

 

·Public Key Infrastructure (PKI) for User and Device authentication, Data encryption and Data signature (Station-to-Vehicle / Service Provider / Station-to-Station)

 

·Certificate Authorities and Vehicle-to-Grid (V2G) Root CA, Aligned with Certificate Pools and Roaming Hubs Policies like CHARIN, HUBJECT & GIREVE

 

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21 https://www.berginsight.com/the-number-of-connected-ev-charging-points-in-europe-and-north-america-to-reach-79-million-by-2025

22 https://ihsmarkit.com/research-analysis/ev-charging-infrastructure-report-and-forecast.html

 

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d. Strategic Outlook for 2024

 

1.Asset tracking.

 

In Q3 2023, WISeKey and SEALSQ engaged into a consortium - Smart Container Consortium- gathering various players within the logistics industry and aiming at transforming this industry through innovative technology. Members of the consortium include Bernardino Abad S.L., FOSSA Systems, Avant iot, Integral Group, SEALSQ, WISeSat.Space, and Caspian Container Company.

 

The consortium aims to deploy IoT-enabled devices and sensors in containers for real-time, global tracking via the WISeSat Satellite constellation. The solution is to integrate IoT-enabled devices and IoT sensors secured by SEALSQ microchips into smart containers that become traceable anywhere on earth seamlessly via both the WISeSat constellation and traditional land-based communication infrastructures. This initiative aims to create a seamless, secure platform with hybrid IoT communications.

 

The implementation of this technology promises to revolutionize global track and trace capabilities for shipping containers, enhancing transparency, security, and operational efficiency.

 

The consortium is a collaborative effort involving industry pioneers, aiming to create a universally adaptable platform that redefines industry standards. The initiative brings together experts from various sectors, including logistics, cybersecurity, and IoT, to architect and advocate this unified system. As a first client of this initiative, up to 20,000 containers from Caspian Container company are to be equipped and connected during 2024.

 

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Key aspects of the services that the Smart Container Consortium will offer include:

 

Integration of IoT Technologies: The plan involves incorporating IoT-enabled devices and sensors in smart containers. These containers will be monitored and traced by the WISeSat satellite constellation, creating a secure, hybrid IoT communication platform. This technology aims to enhance global tracking and transparency for shipping containers, boosting security and operational efficiency.

 

Advanced Container Monitoring: Containers will be fitted with IoT devices secured by WISeSat IoT sensors, allowing real-time tracking of their location and condition. This integration of satellite and terrestrial IoT communications ensures constant global connectivity.

 

Sustainable and Efficient Logistics: Aligning with DP World’s sustainability goals, this initiative intends to optimize routes and reduce carbon emissions. It promises to set new efficiency standards in logistics, minimizing delays, errors, and costs.

 

Technology Integration: The initiative focuses on equipping containers with advanced WISeSat IoT sensors, secured by SEALSQ semiconductors, providing real-time data on their location, condition, and other vital parameters. The integration of WISeSat Smart container platform and technology into the CargoES platform ensures trusted and global, real-time tracking and tracing capabilities via the WISeSat Satellite constellation and terrestrial infrastructures enabling uninterrupted connectivity worldwide.

 

Eco-Conscious and Efficient Logistics: The integration of these smart containers aligns with WISeKey and DP World’s commitment to sustainability, aiming to optimize routes and reduce carbon emissions. This eco-friendly approach also sets new benchmarks in logistical efficiency, reducing delays, errors, and overall operational costs.

 

2.        Design Center, OSAT and Personalization project

 

WISeKey and SEALSQ jointly, together with ODINS, a Spanish company with extensive experience in R&D&i (Research & Development & Innovation) worldwide and in the design and manufacturing of IoT devices and solutions, intend to establish in the Region of Murcia a “Center of Excellence in Cybersecurity and Microchips” under the financial umbrella of the Microelectronics and Semiconductors Plan (“PERTE CHIP”) initiated by Spain.

 

The project has been submitted to the Spanish government for funding under the PERTE CHIP budgets and features a EUR 146 million investment over a period of 7 years, involving the creation of up to 200 highly qualified direct jobs (300 indirect jobs). The projection estimates of the internal rate of return at the end of year 7 are of 18% with a net present value of EUR 120 million.

 

The project would focus on three key areas of the semiconductor value chain, as the most appropriate response to the global geo factors that condition this market, particularly to reduce the excessive geostrategic dependence on a few countries, located mainly in Southeast Asia:

 

·Design of microcontrollers and their validation chain, prior to their production on an industrial scale.

 

·Testing and assembly: Each chip must be individually tested and assembled in a suitable package, ready to be integrated into the final electronic card: Process known as OSAT (Open Semiconductors Assembly and Test).

 

·Personalization Phase in which the software and identifiers are loaded into the semiconductors. This stage is strategically important in several markets, such as automotive and IoT, where each semiconductor must contain an inviolable identity for full protection in terms of cybersecurity, according to the demands of government regulators.

 

The project would be developed through a "Fabless" environment, and offers a series of significant advantages that respond not only to the current needs of the industry, but also to the demands future at national, European and global level Advantages of our project are rooted in several key factors:

 

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Expertise in Design with RISC-V Technology:

 

Leveraging experienced designers and RISC-V technology enables the creation of highly tailored chips, meeting specific market requirements.

 

Ensures project relevance on a national and international scale, aligning with the PERTE CHIP strategy and the EU CHIP Act.

 

Compliance with Safety Standards and Certifications:

 

Emphasis on developing products that strictly adhere to safety standards, including Common Criteria and NIST.

 

Reinforces user confidence and facilitates product adoption in European, US, and Latin American markets.

 

Aligns with the EU's commitment to certification issues.

 

Collaboration with Third-Party Partners:

 

Partnering for silicon wafer production enhances operational efficiency and enables large-scale production to meet market demands.

 

Rigorous Quality Control System:

 

Establishing a comprehensive quality control system with individual chip testing ensures high standards, allowing only functional chips in the production process.

 

Security in Sensitive Operations:

 

Guaranteeing security in critical processes like data injection, firmware, certificates, and keys.

 

Conducting operations in a Common Criteria EAL5+ certified environment and aligning with the EU's EUCS for heightened security.

 

Late Customization and Flexibility:

 

Customizing chips at an advanced stage and employing "late customization" offers agility in responding to specific customer demands.

 

Reduces lead times and minimum quantities from order, enhancing responsiveness.

 

WISeKey Root-of-Trust Accreditation:

 

Utilizing WISeKey Root-of-Trust, accredited by recognized organizations like WebTrust, Matter, GSMA, and WI SUN, enhances the security of certificates and injected keys.

 

Establishes greater trust in the products.

 

Adaptability to European, American, and Latin American Markets:

 

Project flexibility and customization cater to diverse market needs in Europe and America, contributing to greater acceptance and local adaptation.

 

3.        SEALCOIN

 

Cryptocurrencies, currently safeguarded by public key cryptography, face a significant security challenge with the advent of quantum computing. Traditional cryptographic methods, though robust against current computational capabilities, are susceptible to quantum attacks, which could lead to compromised transactions and weakened trust in digital currencies.

 

SEALSQ has announced the launch of an internal R&D project, named “SEALCOIN” that involves significant technical innovation that would potentially lead to a future creation or adoption of an Internet of Things (“IoT”) Machine to Machine (M2M) token with enhanced security features, including post-quantum cryptography. The SEALCOIN project is at the initial, technical Proof-of-Concept (“PoC”) stage that is focused on the technical feasibility of our most advanced semiconductor (VIC 408) validating, verifying and authenticating a transaction while simultaneously ‘signing’ a transaction (e.g., agreeing on the terms of the transaction) on a Decentralized Ledger Technology (“DLT”). Following a successful, initial PoC, SEALSQ plans to develop a dedicated/proprietary SEALCOIN Service Platform that would enable its corporate and professional clients to access enhanced services deriving from the current cybersecurity products they purchase from SEALSQ (such as, devices and certificates), and lead to the use of a secure token that would enable its technology to automate the settlement of a device’s transaction against the use of a service (including the access of the SEALCOIN Service Platform).

 

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As SEALSQ does not plan to create any specific blockchain or equivalent Decentralized Ledger Technology for the usage of smart contracts, they are planning to collaborate with The Hashgraph Association and Hedera and its subsidiaries to leverage from its pre-existing Decentralized Ledger Technology. This collaboration is intended to ensure that SEALSQ’s solutions will not only constitute a state-of-the-art set of functional innovative services, but also provide them with external recognized expertise in their various duties, including and not limited to jurisdictional analysis review, validation of the nature of the intended dedicated cryptocurrency as a Payment and Utility token, and facilitate the access to relevant, regulated and professional partnerships with potential blockchain providers.

 

SEALSQ currently envisions SEALCOIN’s use cases in the following areas: Smart Home Automation, Supply Chain Management, Autonomous Vehicles, Smart Cities, Healthcare Devices, Energy Trading, Industrial IoT, Retail and Consumer Services and Agricultural Technology.

 

Internally, the completion of the SEALCOIN PoC is planned for July 2024 and completion of the design of the associated SEALCOIN Service Platform (and related token) is planned for Q4 2024. Externally, SEALSQ Corp is in the early phase of engagement with interested parties by collecting expressions of interest in terms of intended application development and access to SEALCOIN’s platform services prior to the full public launch of the product. SEALSQ’s aim is to make the SEALCOIN Service Platform token eligible for trading by pre-existing and regulated players on one or more cryptocurrency platforms once all relevant activities can be clarified and all applicable regulatory approvals have been obtained.

 

e. Environmental, Social and Governance (“ESG”)

 

SEALSQ is committed to ESG principles through the attainment of the ISO 14001 certification. This certification underscores its dedication to implementing robust environmental management systems and further aligns with our values of sustainability, responsibility, and innovation.

 

f. Capital Investments

 

SEALSQ has commenced a significant investment project with the intention of increasing the overall capacity of production within its supply chain. While SEALSQ does not manufacture its own semiconductors, it does own certain capital materials required in order for its suppliers to undertake and complete the production process. One of the key constraining factors for SEALSQ currently is the number of production and testing lines that it has available. In order to increase its production capacity by approximately 5 million units per year, SEALSQ is undertaking a significant capital expenditure project that is forecast to cost USD 3.4 million, split between its supplier’s factory in Taiwan and the research and development headquarters in France. The project will be funded by a combination of cash flow from operating activities and an advance payment of USD 2.0 million from a key customer in exchange for additional delivery slots.

 

SEALSQ is also developing a brand-new generation of Secure Elements implementing new technologies in order to optimize its footprint, and thus its cost, a Flash memory providing more customization flexibility, and a new generation of Crypto Processor capable to run Post-Quantum algorithms selected by the NIST. This project will require an investment of approximately USD 3.0 million and will be funded by a combination of cash flow from operating activities, grants and other available subsidies from local, national and international funding agencies.

 

SEALSQ’s current focus on R&D extends its portfolio along the following technological evolutions:

 

·the QUASARS (QUAntum resistant Secure ARchitectureS) project, a radical innovative solution, based upon the new WISeKey Secure RISC V based platform that is paving the way for the Post Quantum Cryptography era,

 

·silicon techniques to bolt our secure vault to general purpose processors in a certifiable tamperproof way,

 

·software techniques to secure and automate the onboarding of a connected device with a platform in a cloud,

 

·cryptographic techniques to combine post-quantum attack resistance with our side channel attack resistance in a certifiable way,

 

·ledger and blockchain techniques to offer a transparent, immutable, and cryptographically verifiable journal of our lifecycle management,

 

·a cryptocurrency protocol designed to enable internet-connected devices to autonomously engage in seamless data and currency exchanges (SEALCOIN),

 

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·countermeasure techniques to stay ahead of the cyberattack evolutions, and

 

·in partnership with FOSSA and WISeKey, the launch of the WISeSat constellation, picosatellites, manufactured by FOSSA, to enable the direct connection of satellites to IoT devices.

 

While SEALSQ’s current products serve its current markets well, we believe the products resulting from SEALSQ’s R&D will create additional opportunities in upgrade markets, in different sectors, and in new applications of its technology in innovating markets.

 

If SEALSQ’s efforts to attract prospective customers and to retain existing customers are not successful, our growth prospects and revenues may be adversely affected. Please refer to Item 3.D.Risk Factors for a discussion of such risks and information that should be considered before making an investment decision with respect to our Class B Shares and/or our American Depositary Shares.

 

g. Sales & Distribution

 

·Operational review: 2023, A record year for new projects

 

During the year 2023, SEALSQ created a record of 28 new Design-WIN et new 15 Design-IN, with anticipated pipe growth in 2024.

 

SEALSQ pipe growth is driven by:

 

ØExisting customers such as TOSHIBA, and Landis&Gyr, who have selected SEALSQ’s new VaultIC408 for the new smart meters design, as well as LEGIC who has engaged with SEALSQ for a new packaging form factor for LEGIC’s new device generation using our MS6001 secure chip.

 

ØNw customers, among which:

 

oa large number of Matter (consumer connected devices standard protocol) device makers who have selected SEALSQ’s Matter certified PKI offer, either alone or in combination with our new VaultIC 292 secure element.

 

oEV Charger suppliers: VESTEL one of the largest Original Design Manufacturer based in Turkey, and Bytesnaps a UK system integrators.

 

oSmart Meter: SECURE METER, an Indian Original Design Manufacturer.

 

·Strategic outlook: Scaling-up SEALSQ’s global footprint in 2024

 

In 2023, SEALSQ strategically expanded its global presence by signing impactful partnerships with renowned distributors and sales representative organizations across key regions. These collaborations not only solidified SEALSQ's market position but also facilitated its growth trajectory by leveraging the unique strengths and capabilities of each partner.

 

In the EMEA region, SEALSQ partnered with Micon, a semiconductor distribution and services company with a strong foothold in Israel, the Nordics, and Italian markets. Micon's geographical footprint and existing customer base across diverse target industries aligns perfectly with SEALSQ's development goals. By leveraging Micon's established network and market insights, SEALSQ gained valuable access to new opportunities in verticals like Military, Consumer IoT, or Smart Grid in these strategic regions.

 

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Across North America, SEALSQ strategically aligned with three sales representative organizations: CJR Associates, Rep One and Impact Technical Sales to cover the entire northeast coast of the US. In parallel, SEALSQ entered into a representation and distribution agreement with Symmetry, a large American semiconductor distribution and services organization spanning the whole of the U.S.. Renowned for their industry expertise and client-focused approach all four companies bring decades of experience and deep understanding of the market landscape, providing SEALSQ with unparalleled access to key sectors and customer segments and creating a backbone of commercial touchpoints across the United States. These partners and the clients they bring-in will be efficiently supported by SEALSQ’s domestic team which size has significantly increased during the year as a result of SEALSQ’s intense hiring efforts in the region, a trend that is poised to continue throughout 2024.

 

In Asia, SEALSQ has also been bolstering its presence both with new partnerships and reinforcing the local sales team.

 

In Taiwan, SEALSQ forged partnerships with GRL, a global design Lab, and Holystone a leading local electronic components distributor. Their expertise efficiently complements SEALSQ's vision for expansion and growth in the Taiwanese market and has already brought in several new businesses across the year, especially around consumer IoT, PKI and Matter Smart Home verticals.

 

In Japan, SEALSQ strategically collaborated with Okaya Electronic and Allion, esteemed distributors with deep-rooted industry experience and a strong track record of success. Their extensive market knowledge and customer-centric approach enable SEALSQ to navigate efficiently the complexities of the Japanese market and business culture.

 

II. Our Satellite Vertical

 

WISeSat Highlights 2023

 

WISeSat.Space SA, is a wholly-owned subsidiary of WISeKey, that aims to offer satellite IoT connectivity available anywhere on earth. WISeSat.Space operates in collaboration with Fossa Systems for the production and launch of a constellation of picosatellites referred to as “WISeSat” satellites. This venture, enhanced through partnership with SEALSQ, aims to address pressing security concerns in satellite communication. By integrating the advanced VaultIC408 secure element into the satellites, gateways and sensors, the collaboration significantly strengthens the security of each node within the satellite network, offering businesses of all sizes a highly secure and cost-efficient method to build their digital infrastructures.

 

To date, seventeen satellites equipped with WISeSat.Space technology have been launched into orbit aboard SpaceX rockets, marking the initial phase of a visionary plan to deploy an 80-satellite constellation. This network aspires to provide comprehensive global IoT connectivity with an impressive data latency goal of just 10 hours.

 

Geostationary (“GEO”) satellites have long provided Internet access to remote regions, with few satellites covering the globe due to their large size and stationary position relative to Earth. Despite their global reach and simple ground antenna setup, GEO satellites suffer from high latency, over 600 milliseconds, making them unsuitable for modern applications like real-time video, gaming, and virtual reality due to the long distance (36,000 km) signals must travel to and from Earth.

 

The use of WISeSat.Space operations employing Low Earth Orbit (“LEO”) satellites presents a transformative potential across a wide range of sectors beyond the initial applications in smart farming, energy, logistics, and the Industrial Internet of Things (“IIoT”). By leveraging the lower latency and the potential for higher-speed Internet connections provided by WISeSat LEO satellites, as compared to geostationary (GEO) satellites, numerous sectors stand to benefit significantly.

 

Sectors that can benefit from WISeSat LEO Satellites include:

  

1.   Environmental Monitoring and Climate Change

WISeSat satellites can be instrumental in monitoring climate change by providing data on atmospheric conditions, sea level rise, ice sheet melting rates, and deforestation. This real-time data is crucial for predicting weather patterns, tracking natural disasters, and implementing early warning systems for floods, hurricanes, and wildfires, thereby aiding in disaster preparedness and response.

 

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2.   Maritime and Aeronautical Applications


 

For maritime and aeronautical sectors, WISeSat satellites offer improved navigation, communication, and tracking of vessels and aircraft over vast and remote areas like oceans and polar regions. Enhanced AIS (“Automatic Identification System”) tracking, coupled with real-time weather and oceanographic data, can significantly improve maritime safety and efficiency. Similarly, in aviation, better communication and tracking can enhance route planning, safety, and search and rescue operations.

  

3.   Defense and National Security

The defense sector can leverage WISeSat satellites for secure communication, reconnaissance, surveillance, and remote sensing over global hotspots. Real-time satellite imagery and data can support tactical operations, border security, and monitoring of strategic assets.

 

4.   Healthcare and Telemedicine

WISeSat satellites can bridge the digital divide by providing high-speed internet access to remote and underserved regions, facilitating telemedicine services. This can revolutionize healthcare delivery, enabling remote diagnostics, patient monitoring, and access to specialist consultations, thereby improving health outcomes in rural and isolated communities.

 

5.   Education

Access to reliable and fast internet is a cornerstone for modern education. WISeSat satellites can provide connectivity to remote and rural schools, supporting digital learning platforms, virtual classrooms, and access to a vast array of online educational resources, thus democratizing education.

 

6.   Banking and Financial Services

The financial sector, including banking, trading, and other services, can benefit from the low-latency network provided by WISeSat satellites. This is crucial for high-frequency trading where milliseconds matter, rural banking, mobile payment systems, and financial inclusion initiatives in remote areas.

 

7.   Media and Entertainment  

For media and entertainment, WISeSat satellites enable live broadcasting, streaming of high-definition content, and new forms of interactive entertainment even in remote locations. This can significantly enhance the viewer experience for global events, remote sports broadcasting, and provide universal access to entertainment and information.

 

8.   Scientific Research and Space Exploration  

WISeSat satellites support scientific research in areas like astrophysics, earth sciences, and environmental monitoring. They also play a crucial role in space exploration, acting as relay stations for deep space missions, enhancing communication, and data transfer between Earth and spacecraft or space stations.

 

9.   Tourism and Adventure  

With the advent of space tourism, WISeSat satellites could provide communication and safety support for commercial space flights, space hotels, and other off-world adventures. Additionally, they can enhance experiences for adventure tourism on Earth by offering navigation, safety tracking, and communication in remote regions.

 

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10.    Urban and Smart Cities  

In the context of urban development, WISeSat satellites can support smart city initiatives by providing real-time data for traffic management, public safety, environmental monitoring, and infrastructure management, ensuring efficient and sustainable urban living.

 

By harnessing the capabilities of WISeSat satellites through WISeSat.Space operations, we believe that these sectors can achieve unprecedented levels of efficiency, accessibility, and global reach, paving the way for innovative solutions to some of the world's most pressing challenges.

 

Example: The WISeContainer Offering

 

As part of the use-cases and derived offering, “WISeContainer” stands as an initiative for Track & Trace of Smart Containers. The solution aims at disrupting the logistic industry through container sensorization and advanced IoT and data (location, temperature etc.) management platform to optimize supply chains and business. The offering is based on several industrial partnerships that WISeKey and Caspian Container company initiated by launching the Smart Container Consortium at the Global Freight Summit in Dubai.

 

This pioneering initiative, known as the Smart Container Consortium, is dedicated to revolutionizing container logistics through the deployment of IoT-enabled devices and sensors. This innovative approach ensures global, real-time tracking and tracing capabilities via multimodal telecommunications Earth and Satellite.

 

The Consortium’s primary focus is to equip every container of the Caspian Container Company with WISeKey’s cutting-edge sensor and Secure Element

 

The Consortium has garnered the support of several industry leaders, including Bernardino Abad S.L., FOSSA Systems, Avant iot, SEALSQ, and others.

 

WISeKey also joined forces in this endeavor with several port authorities like DP World and Port of Algeciras.

 

III. Our WISe.ART Vertical

 

WISe.ART is a proprietary comprehensive multi-blockchain secured digital ecosystem designed to connect multiple participants in the fine arts and luxury industry. Key features of WISe.ART:

 

1.Digital Certificates of Ownership: WISe.ART introduces a unique digital certificate in the form of a non-fungible token (NFT). These NFTs live on a blockchain, unchanged and unchallengeable, serving as proof of a person’s ownership of a specific piece of art.

 

2.Authenticated and Signed Digital Assets: WISe.ART ensures that each digital asset is authenticated and signed, creating an irreversible link from the digital asset (the NFT) to the physical object. This process enables digital proof of ownership, provenance, and contracts enabling future use in monetization streams.

 

3.Mayte Spínola Gold Medals Awards Ceremony: In celebration of the 80th birthday of Mayte Spínola, an emblematic figure in the world of art and culture, the Mayte Spínola Gold Medals 2024 were awarded in their special 10th edition. This prestigious event took place in the iconic Nasdaq building in New York, marking a milestone in the promotion and recognition of artistic and cultural talent globally.

 

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4.White-Labeling Options: WISe.ART offers white-labeling options, allowing artists and creators to customize their NFTs and create a unique brand identity.

 

5.Linking Digital Assets to Physical Objects: The NFTs not only represent the digital asset but also link it irreversibly to a physical object, enhancing transparency and trust in the art market.

 

WISe.ART aims to revolutionize the art world by combining cutting-edge technology with the timeless beauty of artistic expression.

 

Who can use WISe.ART?

 

WISe.ART is accessible to a diverse audience within the arts and luxury industry. Here are some key groups of people who can benefit from using WISe.ART:

 

1.Artists and Creators: WISe.ART provides a platform for artists and creators to showcase their work, create digital certificates of authenticity (NFTs), and link their digital assets to physical objects. Artists can leverage this technology to protect their intellectual property and establish provenance.

 

2.Collectors and Buyers: Art collectors and buyers can use WISe.ART to verify the authenticity of artworks they acquire. The NFTs serve as irrefutable proof of ownership and provenance and can enhance the value of their collections.

 

3.Galleries and Museums: Institutions in the art world can collaborate with WISe.ART to digitize their collections, create NFTs for artworks, and ensure transparency in transactions. This technology can revolutionize how galleries and museums manage and display art.

 

4.Auction Houses and Dealers: Auction houses and dealers can integrate WISe.ART into their processes to authenticate and track artworks. The secure NFTs provide confidence to both sellers and buyers during auctions and sales.

 

5.Art Enthusiasts and Curators: Anyone passionate about art can explore WISe.ART’s ecosystem, discover new artists, and engage with the art community. Curators can curate digital exhibitions and promote emerging talents.

 

6.Blockchain and Technology Experts: WISe.ART’s use of blockchain technology appeals to experts in the field. They can use it as a secured tool and contribute to its development, security, and scalability.

 

In summary, WISe.ART aims to empower stakeholders in the art ecosystem to bridge the gap between physical and digital art through NFTs and secure authentication processes.

 

In 2023, WISe.ART reached new heights with new partnerships and several major charity events, doubling its community of participating artists from around the world with over 2000 works uploaded on the platform 50% of which are digital artworks with an even balance of phygital packages (blending digital and physical experiences) averaging a total value of artwork over USD 30 million.

 

 

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Featuring over 2000 artworks by over 150 artists

 

WISe.ART features over 2000 artworks by over 150 artists worldwide ranging from traditional art, video art to 3 dimensional AI productions. Approximately half of the digitally uploaded artworks are linked to physical pieces which can be shipped around the world. Trackable chips signaling changes in temperature, humidity, movement, or shock can be applied to the physical artworks for safer logistics and reduced insurance costs.

 

Development of the WISe.ART phase 3.0n with Hedera and Google Tokenization

 

Negotiations have begun for WISe.ART’s phase 3 journey into Web03, tokenization with a view to launch a utility coin as described below to allow users who own coins to access benefits on the WISe.ART platform.

 

We intend to develop this feature as well as enhance the performance of the platform with the assistance and financial support of Google and their respective partners. The WISe.ART tech team have identified the workload and the launch is planned for Q3 and Q4 of 2024.

 

Furthermore, the tokenization of WISe.ART will be orchestrated with the funding of USD 750K and the technical assistance of HEDERA which also means that we aim to, subject to completion of applicable legal and regulatory due diligence and to potential geographic limitations, add the Hashgraph coin to our multi-blockchain offer by the end of 2024.

 

Partnerships with private foundations – GMArtification – Digital Renaissance

 

WiseArt, in collaboration with prestigious artists, collectors, museums, and galleries, is excited to introduce the ‘Italy Digital Renaissance Project.’ From 2024 to the 2025 Jubilee year, WISe.ART collaborating partners endeavor to digitize the historical heritage of Italian Renaissance art using ultra-high-quality images and digital enhancements. This project represents a pivotal moment in ushering Italian art heritage into the digital age, making it accessible to a global audience.

 

As part of this initiative, a unique Renaissance coin will be introduced, enabling individuals to acquire a digital copy or fragment of some remarkable historical treasures on the WISe.ART platform. The project will connect art enthusiasts from around the world through the Internet, allowing them to explore and appreciate humanity’s extraordinary cultural heritage, some of which was previously only accessible within museums and historic buildings. Thanks to this technology, these treasures would then be digitally visualized and enjoyed by more people around the world.

 

IV. Our Trust Services Vertical

 

Our Trust Services Vertical is comprised of a full range of managed cloud services to enable trusted and verified digital identities for people, applications and objects. Highlights in 2023 include:

 

·Optimization of the “Unified Trust Center.” WISeKey keeps evolving and improving our High Security Trust Center, which serves as the foundation to deliver trust services both internally, to serve the needs of SEALSQ (PKI for IoT) and other initiatives of WISeKey SA and externally, to serve our customers. This Unified Trust Center brings greater advantages to the group, such as cost reduction and unified high-security practices.

 

·Increase of the Managed PKI customer base and revenues. WISeKey has significantly increased the business related to Transport Layer Security (TLS, a widely adopted security protocol designed to facilitate privacy and data security for communications over the internet) and Personal Digital Certificates, with higher footprint in regions such as APAC, thanks to key channel agreement.

 

·Improvement of the WISeID platform for personal digital identity. WISeID is now recognized as a fully-fledged solution for personal identity, and has been adopted by the Government of Seychelles as its National ID platform. WISeID has been enriched with new features such as Document Signing, and is evolving to add Web 3.0 capabilities, such as Distributed Identity.

 

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WISeID use case: SeyID – National ID for Seychelles:

 

In 2022 the Government of Seychelles choose WISeID as the strategic platform to build its initiative for a National Digital ID, available for all citizens and also for non-residents (for international businesses and tourism purposes). This platform was branded as “SeyID”, and it is a customized edition of WISeID, which includes a web platform and a mobile App, available for iOS and Android.

 

During 2023 WISeKey has been successfully enlarging the capabilities of SeyID, including the introduction of a “ID Wallet” feature, which allows Seychellois citizens to store and use their “National ID Card” and “Driver License”, in digital format, from the “SeyID App”, eliminating the need to carry the physical documents in their daily activities.

 

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, 2023. Although not all of our subsidiaries are wholly-owned, all of them are assessed as being under our control.

 

 

As at December 31, 2023, 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, 2023
WISeKey SA   Switzerland   95.75%
WISeKey Semiconductors SAS   France   58.83 %*

 

* WISeKey owns 100% of the F shares of SEALSQ and 38.85% of the Ordinary Shares of SEALSQ. SEALSQ is the parent company of WISeKey Semiconductors SAS. 

 

D.Property, Plant, 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.

 

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As of December 31, 2023, the net book values of tangible fixed assets were as follows:

 

      As at December 31, 2023
Asset category    

Net book value 

(USD millions)

Machinery & equipment     3.0
Office equipment and furniture     0.2
Computer equipment and licenses     0.2
Total tangible fixed assets     3.4

 

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, 2023:

 

Location  

Size of Site 

(in m2)

  Use of the Property
Meyreuil, France   1,498*   Research & development, sales & marketing, administration.
Geneva, Switzerland   854*   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 the