T Stamp Inc 10-Q for FY2022 Q3
T Stamp Inc (IDAI)
About this 10-Q
T Stamp Inc filed this 10-Q on November 10, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.35M
- up 308.5% from $330.1K a year earlier
- Net loss
- $3.44M
- compared with a net loss of $3.04M a year earlier
- Diluted EPS
- -$0.15
- compared with -$0.16 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
OF 1934
For the quarterly period ended
Or
ACT OF 1934
For the transition period from ______________ to _____________
Commission file number:
(Exact name of registrant as specified in its charter)
| ||
|
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
| |
Indicate by check mark whether the registrant (1) has filed 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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer | ☐ |
☒ | | Smaller reporting company | ||
| | | Emerging growth company |
If an emerging growth company, 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 10, 2022, there were
T STAMP INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
T STAMP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30, 2022 |
| December 31, 2021 | ||
| | (unaudited) | | | | |
ASSETS |
| |
|
| |
|
Current Assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | | | $ | |
Accounts receivable | |
| | |
| |
Related party receivables | |
| | |
| |
Prepaid expenses and other current assets | |
| | |
| |
Total Current Assets | |
| | |
| |
Capitalized internal-use software, net | |
| | |
| |
Goodwill | |
| | |
| |
Digital assets | | | | | | — |
Intangible assets, net | |
| | |
| |
Property and equipment, net | |
| | |
| |
Other assets | |
| | |
| |
Total Assets | | $ | | | $ | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
|
| |
|
|
Current Liabilities: | |
|
| |
|
|
Accounts payable | | $ | | | $ | |
Related party payables | |
| | |
| |
Accrued expenses | |
| | |
| |
Deferred revenue | |
| | |
| |
Customer deposit liabilities | | | — | | | |
Short-term financial liability | |
| | |
| — |
Total Current Liabilities | |
| | |
| |
| | | | | | |
Warrant liabilities | |
| | |
| |
Non-convertible notes payable, non-current, plus accrued interest of $ | |
| | |
| |
Long-term financial liability | | | | | | — |
Total Liabilities | |
| | |
| |
| | | | | | |
Commitments and Contingencies, Note 13 | |
|
| |
|
|
| | | | | | |
Stockholders' Equity: | |
|
| |
|
|
Series A Preferred Stock $ | |
| |
| ||
Common stock $ | |
| | |
| |
Treasury stock, at cost: | |
| — | |
| — |
Additional paid-in capital | |
| | |
| |
Noncontrolling interest | |
| | |
| |
Stockholders' notes receivable | |
| ( | |
| ( |
Accumulated other comprehensive income | |
| | |
| |
Accumulated deficit | |
| ( | |
| ( |
Total Stockholders' Equity | |
| | |
| |
Total Liabilities and Stockholders' Equity | | $ | | | $ | |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3
T STAMP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | | For the three months ended | | | For the nine months ended | ||||||
|
| | September 30, |
|
| September 30, | ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net revenue | | $ | | | $ | | | $ | | | $ | |
Operating Expenses: |
| | |
| | |
| |
|
| |
|
Cost of services (exclusive of depreciation and amortization shown separately below) |
| | |
| | |
| | |
| | |
Research and development |
| | |
| | |
| | |
| | |
Selling, general, and administrative |
| | |
| | |
| | |
| | |
Depreciation and amortization |
| | |
| | |
| | |
| | |
Total Operating Expenses |
| | |
| | |
| | |
| | |
Operating Loss |
| | ( |
| | ( |
| | ( |
| | ( |
Non-Operating Income (Expense): |
| | |
| | |
| |
|
| |
|
Interest income (expense) |
| | ( |
| | ( |
| | ( |
| | ( |
Change in fair value of warrant liability |
| | |
| | ( |
| | |
| | ( |
Grant income | | | — | | | | | | — | | | |
Impairment of digital assets | | | ( | | | — | | | ( | | | — |
Other income |
| | |
| | — |
| | |
| | |
Other expense |
| | ( |
| | ( |
| | ( |
| | ( |
Total Other Income (Expense), Net |
| | |
| | ( |
| | ( |
| | ( |
Net Loss before Taxes |
| | ( |
| | ( |
| | ( |
| | ( |
Income tax expense |
| | — |
| | — |
| | — |
| | — |
Net loss including noncontrolling interest |
| | ( |
| | ( |
| | ( |
| | ( |
Net loss attributable to noncontrolling interest |
| | — |
| | ( |
| | — |
| | ( |
Net loss attributable to T Stamp Inc. | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Basic and diluted net loss per share attributable to T Stamp Inc. | | ( | | ( | | ( | | ( | ||||
Weighted-average shares used to compute basic and diluted net loss per share | |
| | |
| | |
| | |
| |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
T STAMP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
| | For the three months ended | | | For the nine months ended | |||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net loss including noncontrolling interest | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Other Comprehensive Income (Loss): |
| | |
| | |
| |
|
| | |
Foreign currency translation adjustments |
| | ( |
| | |
| | ( |
| | |
Total Other Comprehensive Income (Loss) |
| | ( |
| | |
| | ( |
| | |
Comprehensive loss |
| | ( |
| | ( |
| | ( |
| | ( |
Comprehensive loss attributable to noncontrolling interest |
| | — |
| | ( |
| | — |
| | ( |
Comprehensive loss attributable to T Stamp Inc. | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
T STAMP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
|
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
| Accumulated |
|
| |
|
| | |
| | | |
| | | Additional | |
| |
| | |
| | | Stockholders' | | Other | |
| | |
| | |||
| | Common Stock | | Paid-In | | Treasury Stock | | Noncontrolling | | Notes | | Comprehensive | | Accumulated | |
| | |||||||||||
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Interest |
| Receivable |
| Income |
| Deficit |
| Total | ||||||||
Balance, June 30, 2021 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
Issuance of common stock | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Issuance of common stock warrants |
| — | |
| — | |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| |
Repayment of shareholders loan through in-kind services |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| | |
| — | |
| — | |
| |
Stock-based compensation | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Currency translation adjustment |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| | |
| — | |
| |
Net loss attributable to non-controlling interest | | — | | | — | | | — | | — | | | — | | | ( | | | — | | | — | | | — | | | ( |
Net loss attributable to T Stamp Inc. |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| ( | |
| ( |
Balance, September 30, 2021 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
| Accumulated |
| | |
|
| | |
| | | | | | | Additional | | | | | | | | | | Stockholders’ | | Other | | | | | | | |||
| | Common Stock | | Paid-In | | Treasury Stock | | Noncontrolling | | Notes | | Comprehensive | | Accumulated | |
| | |||||||||||
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Interest |
| Receivable |
| Income |
| Deficit |
| Total | ||||||||
Balance, June 30, 2022 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
Exercise of options to common stock |
| | |
| | |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| |
Issuance of common stock | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Issuance of common stock warrants | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Repayment of shareholders loan through in-kind services |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| | |
| — | |
| — | |
| |
Stock-based compensation |
| — | |
| — | |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| |
Currency translation adjustment |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| ( | |
| — | |
| ( |
Net loss attributable to T Stamp Inc. |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| ( | |
| ( |
Balance, September 30, 2022 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
6
T STAMP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
| | |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
| Accumulated |
| | |
|
| | |
| | | | | | | Additional | | | | | | | | | | Stockholders’ | | Other | | | | | | | |||
|
| Common Stock | | Paid-In | | Treasury Stock | | Noncontrolling | | Notes | | Comprehensive | | Accumulated | |
| | |||||||||||
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Interest |
| Receivable |
| Income |
| Deficit |
| Total | ||||||||
Balance, January 1, 2021 | | | | $ | | | $ | | | | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
Exercise of warrants to common stock |
| |
| | |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | |
Issuance of common stock |
| |
| | |
| | |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | |
Issuance of common stock warrants | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Repayment of shareholders loan through in-kind services |
| — |
| | — |
| | — |
| — |
| | — |
| | — |
| | |
| | — |
| | — |
| | |
Stock-based compensation |
| — |
| | — |
| | |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | |
Currency translation adjustment |
| — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | |
| | — |
| | |
Net loss attributable to non-controlling interest |
| — |
| | — |
| | — |
| — |
| | — |
| | ( |
| | — |
| | — |
| | — |
| | ( |
Net loss attributable to T Stamp Inc. |
| — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | ( |
| | ( |
Balance, September 30, 2021 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
|
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| Accumulated |
|
| |
|
| |
| | | |
| | | Additional | |
| |
| | |
| | | Stockholders' | | | Other | |
| | |
| | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Noncontrolling | | Notes | |
| Comprehensive | | Accumulated | |
| | ||||||||||
|
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Interest |
| Receivable |
| | Income |
| Deficit |
| Total | |||||||
Balance, January 1, 2022 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( |
| $ | |
Exercise of warrants to common stock |
| | |
| | |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| |
Exercise of options to common stock |
| | |
| | |
| |
| — | |
| — | |
| — | |
| — | | | — | |
| — |
| | |
Issuance of common stock |
| | |
| | |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| |
Issuance of common stock warrants |
| — | |
| — | |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
| | |
Issuance of common stock in relation to vested restricted stock units, net of shares forfeited to satisfy taxes |
| | |
| | |
| ( |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
|
| ( |
Repayment of shareholders loan through in-kind services |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| | |
| — | |
| — |
|
| |
Stock-based compensation | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Currency translation adjustment | | — | | | — | | | — | | — | | | — | | | — | | | — | | | ( | | | — | | | ( |
Net loss attributable to T Stamp, Inc. |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — | |
| ( |
|
| ( |
Balance, September 30, 2022 |
| | | $ | | | $ | |
| | | $ | — | | $ | | | $ | ( | | $ | | | $ | ( |
| $ | |
7
T STAMP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| For the nine months ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net loss attributable to T Stamp Inc. | | $ | ( | | $ | ( |
Net loss attributable to noncontrolling interest | |
| — | |
| ( |
Adjustments to reconcile net loss to cash flows used in operating activities: | |
| | |
| |
Depreciation and amortization | |
| | |
| |
Stock-based compensation | |
| | |
| |
Change in fair value of warrant liability | |
| ( | |
| |
Repayment of shareholder loan through in-kind services | |
| | |
| |
Impairment of digital assets | | | | | | — |
Changes in assets and liabilities: | |
| | |
| |
Accounts receivable | |
| ( | |
| ( |
Related party receivables | |
| ( | |
| ( |
Prepaid expenses and other current assets | |
| | |
| ( |
Other assets | |
| | |
| ( |
Accounts payable and accrued expenses | |
| ( | |
| ( |
Related party payables | |
| ( | |
| |
Deferred revenue | |
| | |
| ( |
Customer deposit liabilities | | | ( | | | — |
Net cash flows from operating activities | |
| ( | |
| ( |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
Purchases of property and equipment | |
| ( | |
| ( |
Capitalized internally developed software costs | |
| ( | |
| ( |
Acquisition of Pixelpin intangible asset | |
| | |
| ( |
Purchase of digital assets | | | ( | | | — |
Patent application costs | |
| ( | |
| ( |
Net cash flows from investing activities | |
| ( | |
| ( |
Cash flows from financing activities: | |
| | |
| |
Proceeds from exercise of warrants to common stock | |
| | |
| — |
Proceeds from exercise of options to common stock | |
| | |
| — |
Proceeds from issuance of common stock | |
| | |
| |
Proceeds from issuance of common stock warrants | |
| | |
| |
Principal payment on financial liability | | | ( | | | — |
Proceeds from debt, net of issuance costs | | | — | | | ( |
Proceeds from loan from Maltese government | |
| — | |
| |
Net cash flows from financing activities | |
| | | | |
Effect of foreign currency translation on cash | |
| ( | |
| |
Net change in cash and cash equivalents | |
| ( | |
| ( |
Cash and cash equivalents, beginning of period | |
| | |
| |
Cash and cash equivalents, end of period | | $ | | | $ | |
| | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| |
Cash paid during the period for interest | | $ | | | $ | |
| | | | | | |
Supplemental disclosure of non-cash activity: | | | | | | |
Property and equipment acquired under financial liability | | $ | ( | | $ | |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
8
T STAMP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business - T Stamp Inc. was incorporated on April 11, 2016 in the State of Delaware. T Stamp Inc. and its subsidiaries (“Trust Stamp”, “we”, “us”, “our” or the “Company”) develops and markets identity authentication software solutions for enterprise and government partners and peer-to-peer markets.
Trust Stamp develops proprietary artificial intelligence-powered solutions, researching and leveraging biometric science, cryptography, and data mining, to deliver insightful identity and trust predictions that identify and defend against fraudulent identity attacks, protect sensitive user information, and extend the reach of digital services through global accessibility. We utilize the cutting-edge power and agility of technologies such as GPU processing, edge-computing, and neural networks to process and protect data faster and more effectively than has ever previously been possible, to deliver results at a disruptively low cost for usage across multiple industries, including:
| ● | Banking/FinTech |
| ● | KYC/AML Compliance |
| ● | Humanitarian and Development Services |
| ● | Government and Law Enforcement, including Alternative to Detention programs |
| ● | Cryptocurrency and Digital Assets |
| ● | Biometrically Secured Email and Digital Communications |
| ● | P2P Transactions, Social Media, and Sharing Economy |
| ● | Real Estate, Travel and Healthcare |
Stock Split - On August 18, 2021, by written consent of the stockholders, the Company effected a
Regulation D Common Stock Offering - On March 12, 2021, the Company launched a Regulation D offering of its Class A Common Stock to accredited investors for $
Regulation CF, D, and S Common Stock and Warrant Offering - On August 25, 2021, the Company launched concurrent offerings under Regulation Crowdfunding (“Regulation CF”), Regulation D and Regulation S. The Company initially sought to raise up to $
On November 19, 2021, we closed the Regulation CF offering, having received binding commitments for
9
Regulation CF Units to
On January 7, 2022, we closed the public portion of the Regulation D offering and conducted an additional close on February 2, 2022. As of December 31, 2021, the Company received $
On January 7, 2022, we closed the Regulation S offering. We raised a final total of $
Going Concern - The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a business that has not yet generated profits, with a loss in the nine months ended September 30, 2022 of $
The Company’s ability to continue as a going concern in the next twelve months following the date the consolidated financial statements were available to be issued is dependent upon its ability to produce revenues and/or obtain financing sufficient to meet current and future obligations and deploy such to produce profitable operating results. Refer to Revenue Recognition in Note 1 for an expanded discussion of the
Basis of Consolidation and Presentation - The accompanying consolidated financial statements reflect the activity of the Company and its subsidiaries, Trusted Mail Inc. (“Trusted Mail”), Sunflower Artificial Intelligence Technologies (“SAIT”), Finnovation LLC (“Finnovation”), Trust Stamp Malta Limited (“Trust Stamp Malta”), AIID Payments Limited, Biometric Innovations Limited (“Biometrics”), Trust Stamp Rwanda Limited, Metapresence Limited, and Trust Stamp Denmark ApS. All significant intercompany transactions and accounts have been eliminated.
The Company has entered joint ventures with Biometric Innovations Limited (formerly “Trust Stamp Fintech Limited”) and Trust Stamp Cayman. Due to common ownership of the Company and these two entities, the Company has funded all operating expenses since inception and as a result, the operations of these entities are included in the condensed consolidated financial statements.
Biometric Innovations Limited is a company incorporated in the United Kingdom by the Company’s management. The purpose of this entity was to establish beachhead operations in the country to service a contract entered by the Company with the National Association of Realtors and Property Mark. This entity remains separate from the Company’s operations and serves as a sales and marketing function for the product “NAEA” which was developed for the contract between the listed parties. On June 11, 2020, the Company entered a stock exchange with Biometric Innovations Limited, becoming a
Trust Stamp Cayman was established with the intention of taking advantage of enterprise grants which were offered by the Cayman National Government’s Enterprise Zone. No operations were established. The Company has completed the process of administratively dissolving Trust Stamp Cayman and the dissolution will be effective December 30, 2022. See Note 14 to the financial statements provided under Item 1 of this report for more details.
Further, we continue to consolidate TStamp Incentive Holdings “TSIH” which we consider to be a variable interest entity.
10
Variable Interest Entity - On April 9, 2019, management created a new entity, TSIH. Furthermore, on April 25, 2019, the Company issued
The Company does not own any of the stock in TSIH; however, it is held by members of the Company’s management. The Company considers this entity to be a variable interest entity (“VIE”) because it is thinly capitalized and holds no cash. Because the Company does not own shares in TSIH, management believes that this gives the Company a variable interest. Further, management of the Company also acts as management of TSIH and is the decision-maker as management grants shares held by TSIH to employees of the Company. As this VIE owns only shares in the Company and no other liabilities or assets, the Company is the primary beneficiary of TSIH and will consolidate the VIE.
Use of Estimates — The preparation of the consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates that include, but are not limited to, percentage of completion related to revenue contracts that are not fully complete at the end of a fiscal quarter, capitalization and estimated useful life of internal-use software, the allowance for doubtful accounts, the fair value of financial assets and liabilities, the useful lives of property and equipment and intangible assets, the recoverability of goodwill, stock-based compensation including the determination of the fair value of our common stock, impairment of long-lived assets, the valuation of deferred tax assets and uncertain tax positions, and warrant liabilities. We base our estimates on assumptions, both historical and forward-looking trends, and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Impacts of COVID-19 — The World Health Organization declared in March 2020 that the outbreak of the novel coronavirus disease (“COVID-19”) constituted a pandemic. The COVID-19 pandemic has caused general business disruption worldwide, beginning in January 2020. The Company assessed the impacts of the coronavirus pandemic on its various accounting estimates and significant judgments, including those that require consideration of forecasted financial information in the context of the unknown future impacts of COVID-19, using information that is reasonably available at this time. The accounting estimates and other matters assessed included but were not limited to, capitalized internal-use software, the recoverability of goodwill, long-lived assets and investments recorded at cost, useful lives associated with intangible assets and capitalized internal-use software, and the valuation and assumptions underlying stock-based compensation and warrant liabilities. Based on the Company’s current assessment of these estimates, there was not a material impact to the condensed consolidated financial statements as of and for the nine months ended September 30, 2022. As additional information becomes available, the Company’s future assessment of these estimates, including updated expectations at the time regarding the duration, scope and severity of the pandemic, could materially and adversely impact its consolidated financial statements in future reporting periods.
Segment Information — The Company has a single operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a condensed consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources.
Risks and Uncertainties — The Company is dependent upon additional capital resources for its planned full-scale operations and is subject to significant risks and uncertainties, including failing to secure funding to continue to operationalize the Company’s plans or failing to profitably operate the business.
Major Customers and Concentration of Risks — Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. We maintain our cash and cash equivalents with high-quality financial institutions mainly in the United States; the composition of which are regularly monitored by us. The Federal Deposit Insurance Corporation covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. As of September 30, 2022, and December 31, 2021, the Company had $
11
For accounts receivable, we are exposed to credit risk in the event of nonpayment by customers to the extent the amounts are recorded in the consolidated balance sheets. We extend different levels of credit and maintain reserves for potential credit losses based upon the expected collectability of accounts receivable. We manage credit risk related to our customers by performing periodic evaluations of credit worthiness and applying other credit risk monitoring procedures.
During the three and nine months ended September 30, 2022, the Company sold to primarily
During the three and nine months ended September 30, 2021,
The loss of, or substantial reduction, in statements of work from the Company’s major customers, could have a material effect on the consolidated financial statements. On August 17, 2022, Trust Stamp received notification from ICE that it was terminating the ICE Contract for convenience effective immediately. During the three and nine months ended September 30, 2022, ICE Contract revenue made up
Foreign Currencies — The functional currencies of the Company’s foreign subsidiaries are the local currencies. For those subsidiaries, the assets and liabilities are translated into U.S. dollars at the exchange rate method at the condensed consolidated balance sheet date. The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments related to the Company’s foreign subsidiaries. Income and expenses are translated at the average exchange rates for the period. Foreign currency transaction gains and losses are included in other income or other expense in the condensed consolidated statements of operations.
Cash and Cash Equivalents — Cash and cash equivalents consist of cash in banks and bank deposits. The Company considers all highly liquid instruments purchased with an original maturity of three months or less when purchased as cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts, if any. Allowance for doubtful accounts is based on the Company’s best estimate of probable losses inherent in its accounts receivable portfolio and is determined based on expectations of the customer’s ability to pay by considering factors such as historical experience, financial position of the customer, age of the accounts receivable, current economic conditions, including the ongoing COVID-19 pandemic, and as well as reasonable and supportable forward-looking factors about its portfolio and future economic conditions. Accounts receivables are written-off and charged against an allowance for doubtful accounts when the Company has exhausted collection efforts without success. No allowance for bad debts has been established. Bad debts are recognized when they are deemed uncollectible, and management considers all present receivables fully collectible.
As of September 30, 2022, and December 31, 2021, accounts receivable includes unbilled receivables of $
Property and Equipment, Net — Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed when incurred whereas additions and major improvements are capitalized. Upon sale or retirement of assets, the cost and related accumulated depreciation are derecognized from the consolidated balance sheet and any resulting gain or loss is recorded in the consolidated statements of operations in the period realized.
Capitalized Internal-Use Software, Net — Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development are capitalized. The Company capitalizes eligible costs to develop internal-use software that are incurred subsequent to the preliminary project stage through the development
12
stage. These costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Costs incurred during the preliminary project stage and during the post-implementation operational stage are expensed as incurred. Maintenance costs are expensed as incurred. The estimated useful life of costs capitalized is evaluated for each specific project that is generally five years. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore changes in amortization expense in future periods.
Business and Asset Acquisitions — When the Company acquires a business, the purchase price is allocated to the tangible and identifiable intangible assets, net of liabilities assumed. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
The Company accounts for a transaction as an asset acquisition pursuant to the provisions of ASU No. 2017-01, Clarifying the Definition of a Business, when substantially all of the fair value of the gross assets acquired is concentrated into a single identifiable asset or group of similar identifiable assets, or otherwise does not meet the definition of a business. Asset acquisition-related costs are capitalized as part of the asset or assets acquired.
Accounting for Impairment of Long-Lived Assets — Long-lived assets with finite lives include property and equipment, capitalized internal-use software, and intangible assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company determined that as of September 30, 2022, and December 31, 2021,
Goodwill — Goodwill is accounted for in accordance with FASB ASC 350, Intangibles—Goodwill and Other. The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase consideration transferred over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill. Goodwill is tested for impairment at the reporting unit level at least quarterly or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill for impairment, the Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In the qualitative assessment, the Company considers factors including economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Should the Company conclude that it is more likely than not that the recorded goodwill amounts have been impaired, the Company would perform the impairment test. Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value. Significant judgment is applied when goodwill is assessed for impairment. There were
Digital Asset — Digital assets are currently accounted for intangible assets with indefinite useful lives in accordance with ASC 350, Intangibles—Goodwill and Other. Initially, the Company accounts for digital assets by recording them at cost. Digits assets are not amortized but subsequently remeasured for any impairment losses that may have occurred since acquisition. On a quarterly basis, the Company determines the fair value of the digital asset in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange where the Company purchased the digital asset (Level 1 inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that the digital asset is impaired. Should the Company conclude that it is more likely than not that the recorded digital asset value is impaired, the Company will perform the impairment test. Digital asset impairment exists when the carrying value exceeds the digital asset’s fair value. Significant judgment is applied in assessing the digital asset for impairment, and subsequent
13
reversal of impairment losses is not permitted. During the nine months ended September 30, 2022, we recorded $
Fair Value of Assets and Liabilities — The Company follows the relevant U.S. GAAP guidance regarding the determination and measurement of the fair value of assets/liabilities; in which fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction valuation hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The guidance describes the following three levels of inputs that may be used in the methodology to measure fair value:
Level 1 – Quoted prices available in active markets for identical investments as of the reporting date;
Level 2 – Inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date; and
Level 3 – Unobservable inputs, which are to be used in situations where there is little or no market activity for the asset or liability and wherein the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The estimated fair values of cash, accounts receivable, related party receivables, prepaid expenses and other current assets, other assets, accounts payable, related party payables, accrued expenses, deferred revenue, customer deposit liabilities, and nonconvertible notes payable approximate their carrying values. The fair values of warrant liabilities issued in connection with equity or debt issuance are determined using the Black-Scholes valuation model, a “Level 3” fair value measurement, based on the estimated fair value of the underlying common stock, volatility based on the historical volatility data of similar companies, considering the industry, products and market capitalization of such other entities, the expected life based on the remaining contractual term of the conversion option and warrant liabilities and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrant liability’s contractual life. The Company accounts for its financial assets and liabilities at fair value regularly. The Company evaluates the fair value of its non-financial assets and liabilities on a nonrecurring basis.
Revenue Recognition — The Company derives its revenue primarily from professional services. Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, the Company includes an estimate of the amount it expects to receive or the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company determines the amount of revenue to be recognized through the application of the following steps:
| ● | Identification of the contract, or contracts with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when or as the Company satisfies the performance obligations. |
At contract inception, the Company will assess the services agreed upon within each contract and assess whether each service is distinct and determine those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. In general, each contract with a customer consists of a single performance obligation to perform services in which revenue is recognized when the service has been delivered.
During the year ended December 31, 2021, the Company entered a significant contract with U.S. Immigration and Customs Enforcement (“ICE”) that contained multiple performance obligations, including software application development, mobile hardware, and services to assist ICE (the “ICE Contract”). The Company allocates the transaction price for this contract based on the stand-alone selling price of each performance obligation. The Company uses the expected cost-plus margin approach for determining the stand-alone selling prices of the mobile hardware and services to assist ICE, as this is believed to be the most accurate method of allocating the transaction price to these performance obligations, maximizing the use of observable inputs. As the Company does not have a similar software
14
application that has been sold to another customer, the Company uses the residual approach for determining the stand-alone selling price of the software application development by subtracting the sum of the stand-alone selling prices for the mobile hardware and services to assist ICE from the total transaction price.
Executed on April 5, 2022, and made effective March 27, 2022, Trust Stamp agreed to a modification of this contract with ICE, increasing the total contract award value to $
On July 15, 2022, the Company entered into a second amendment agreement with ICE to amend the terms of the ICE Contract. The second amendment had the effect of implementing an additional up to
On August 17, 2022, Trust Stamp received notification from ICE that it was terminating the ICE Contract for convenience effective immediately. ICE has paid Trust Stamp for the ICE Contract services performed prior to the amendment effective April 15, 2022. Additionally, Trust Stamp has received written notice that ICE will pay $
On September 15, 2022, the Company entered into a Master Services Agreement (“the MSA”) with Innovative Government Solutions, LLC ("IGS") under which the Company and IGS will jointly offer services and IGS is granted a
Contract Balances — The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in liabilities consisting of either deferred revenue (a “contract liability”) or customer deposit liabilities. Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. Such amounts are recognized by the Company over the life of the contract upon meeting the revenue recognition criteria, but generally within one year. Customer deposit liabilities consist of billings or payments received in advance of the start of the contractual term or for anticipated revenue-generating activities for the portion of a contract term that is subject to cancellation for convenience. Certain of the Company’s arrangements generally include terms that allow the customer to terminate the contract for convenience and receive a refund of the amount of the customer deposit for the percentage of the work not performed prior to the notice of termination. In these arrangements, the Company concluded there are no enforceable rights and obligations after such notice period and therefore, the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposit liabilities.
15
The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.
Costs to Obtain and Fulfill Contracts — Incremental costs of obtaining a contract include only those costs that are directly related to the acquisition of contracts, including sales commissions, and that would not have been incurred if the contract had not been obtained. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it is expected that the economic benefit and amortization period will be longer than one year. Costs to obtain contracts were not material in the periods presented. The Company recognizes an asset for the costs to fulfill a contract with a customer if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. Costs to fulfill contracts were not material in the periods presented. The Company elected to apply the practical expedient in accordance with ASC 340 which allows the Company to expense commissions as incurred when the contract term is twelve months or less in total.
Warrants — The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”), depending on the specific terms of the warrant agreement.
Cost of Services — Cost of services generally consists of the cost of hosting fees, materials, and cost of labor associated with professional services rendered. Depreciation and amortization expense is not included in cost of services.
Research and Development — Research and development costs are expensed as incurred and consist primarily of personnel costs such as salaries and benefits and relate primarily to time spent during the preliminary project stage and post implementation maintenance and bug fixes associated with capitalized internal-use software activities, and front-end application development in which technological feasibility has not been established. Depreciation and amortization expense is not included in research and development.
Advertising — Advertising costs are expensed as incurred. Advertising and marketing expenses totaled $
Stock- Based Compensation — The Company accounts for its stock-based compensation arrangements at fair value. Fair value of each stock-based award is estimated on the date of grant using either the Black-Scholes-Merton Model for stock options granted or using the fair value of a common stock for stock grants and restricted stock units. The Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common shares, the expected term of the share option, the expected volatility of the price of our common shares, risk-free interest rates, and the expected dividend yield of common shares. The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. The calculated fair value is recognized as expense over the requisite service period using the straight-line method. Forfeitures are accounted for in the period in which they occur. Trust Stamp offers the indirect repurchase of shares through a net-settlement feature upon the vesting of RSU awards to satisfy minimum statutory tax-withholding requirements for the recipient.
Income Taxes — The Company records income tax provisions for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. The deferred assets and liabilities are measured using the statutorily enacted tax rates anticipated to be in effect when those tax assets and liabilities are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for a valuation allowance.
16
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not the position will be sustainable upon examination by the taxing authority, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. The Company adjusts these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and operating results.
We continue to record a full valuation allowance on all deferred tax assets given our continued history of operating losses and have an effective tax rate of
Leases — Leases are reviewed and classified as either capital or operating leases at their inception. In certain lease agreements, we may receive renewal or expansion options, rent holidays, and other incentives. For operating leases, we recognize lease costs on a straight-line basis once we take control of the space, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.
Commitments and Contingencies — Liabilities for loss contingencies arising from claims, disputes, legal proceedings, fines and penalties, and other sources are recorded when it is probable that a liability has been or will be incurred and the amount of the liability can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of such legal costs from insurance policies are recorded as an offset to legal expenses in the period they are received.
Treasury Stock — Repurchased treasury stock is recorded at cost. When treasury stock is resold at a price different than its historical acquisition cost, the difference is recorded as a component of additional paid-in capital in the consolidated balance sheets.
Net Loss per Share Attributable to Common Stockholders — Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potentially dilutive Class A Shares of Common Stock equivalents for the period. For purposes of this calculation, stock-based awards, warrants, and the conversion option of convertible notes are considered to be potential common shares outstanding. Since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s potential common shares outstanding were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive.
Recent Accounting Pronouncements Not Yet Adopted — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases. The standard requires all leases with lease terms over twelve months to be capitalized as a right-of-use asset and lease liability on the balance sheet at the date of lease commencement. Leases will be classified as either financial or operating. This distinction will be relevant for the pattern of expense recognition in the income statement. The guidance is effective for reporting periods beginning after December 15, 2021, and interim periods beginning after December 15, 2022. The Company is adopting the new guidance during the current annual period and will reflect the effects of such adoption, including the additional required disclosures, in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recently Adopted Accounting Pronouncement — In March 2021, the FASB issued ASU No. 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, an amendment of the FASB Accounting Standards Codification. The amendments in this ASU allow companies to elect not to monitor for goodwill impairment triggering events during the reporting period and instead, to evaluate the facts and circumstances as of the end of the reporting period to determine whether it is more likely than not that goodwill is impaired. This aligns the triggering event evaluation date with the reporting date, whether that date is an interim or annual reporting date. The amendments in this update are effective for fiscal years beginning after December 15, 2019, with early adoption permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. The Company adopted this standard as of January 1, 2022, and the guidance did not have a material impact on its condensed consolidated financial statements or related disclosures.
17
Unaudited Interim Results — These unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP, pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. In management’s opinion, these unaudited condensed consolidated financial statements and accompanying notes have been prepared on the same basis as the annual financial statements and reflect all the adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of September 30, 2022, the results of operations for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. Certain information and note disclosures have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated balance sheet as of December 31, 2021, was derived from the audited financial statements as of that date but does not include all of the disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes for the year ended December 31, 2021 included in the Company’s Annual Report. The Company’s significant accounting policies are described in Note 1 to those audited financial statements.
2. Pixelpin Acquisition and Patent Approvals
On February 23, 2021, Trust Stamp Malta completed an agreement to acquire Pixelpin, an image-based “Pin-on-Glass” account access solution that alleviates pain-points of traditional login methods while ensuring the security of authentication. The Company paid $
|
| Fair Value | |
Trade name and trademarks | | $ | |
Foreign currency translation | |
| |
Total acquisition | | $ | |
On June 1, 2022, Trust Stamp Malta received a $
In addition to the acquisition, the Company experienced continued growth in its robust intellectual property portfolio adding a total of $
3. Borrowings
Non-Convertible Promissory Notes Payable
|
| As of September 30, |
| As of December 31, | ||
|
| 2022 |
| 2021 | ||
Malta loan receipt 3 – June 3, 2022 | | $ | | | $ | — |
Malta loan receipt 2 – August 10, 2021 | |
| | |
| |
Malta loan receipt 1 – February 9, 2021 | | | | | | |
Total principal outstanding | |
| | |
| |
Plus accrued interest | |
| | |
| |
Total promissory notes payable | | $ | | | $ | |
In May 2020, the Company formed a subsidiary in the Republic of Malta, Trust Stamp Malta Limited, with the intent to establish a research and development center with the assistance of potential grants and loans from the Maltese government. As part of the creation of this entity, we entered into an agreement with the government of Malta for a potentially repayable advance of up to €
18
had received $
The Company will pay an annual interest rate of
Financial Liability
Trust Stamp executed an agreement with a telecommunications company for the right to purchase mobile hardware with a monthly service agreement. The mobile hardware is to be purchased at a predetermined price over a
4. Warrants
Liability Classified Warrants
The following table presents the change in the liability balance associated with the liability classified warrants, which are classified in Level 3 of the fair value hierarchy from January 1, 2021, to September 30, 2022:
|
| Warrants ($) | |
Balance as of January 1, 2021 | | $ | |
Additional warrants issued | |
| — |
Change in fair value | | | |
Balance as of December 31, 2021 | | $ | |
Additional warrants issued | | | — |
Change in fair value | | | ( |
Balance as of September 30, 2022 | | $ | |
As of September 30, 2022, the Company has issued a customer a warrant to purchase up to $
The Company has issued an investor warrant to purchase $
19
The Company used a Black-Scholes-Merton pricing model to determine the fair value of the warrants and uses this model to assess the fair value of the warrant liability. As of September 30, 2022, the warrant liability is recorded at $
Equity Classified Warrants
|
| |
| As of September 30, |
| As of December 31, | |
Warrant Issuance Date |
| Strike Price |
| 2022 |
| 2021 | |
September 30, 2016 | | $ | |
| — |
| |
November 9, 2016 | | $ | |
| |
| |
January 23, 2020 | | $ | |
| |
| |
January 23, 2020 | | $ | |
| |
| |
August – December 2021 | | $ | |
| |
| |
January – February 2022 | | $ | |
| |
| — |
September 14, 2022 | | $ | | | | | — |
Total warrants outstanding | |
| |
| |
| |
On September 30, 2016, the Company issued REach® a warrant to purchase
On December 21, 2021, REach® executed a Notice of Exercise for its warrants to purchase
The Company has issued a customer a warrant to purchase
These warrants remain outstanding as of September 30, 2022.
In January 2020, the Company issued REach® a warrant to purchase
These warrants remain outstanding as of September 30, 2022.
In January 2020, the Company issued SCV a warrant to purchase
On December 21, 2021, SCV executed a Notice of Exercise for certain of its warrants to purchase
20
The warrants to purchase the remaining
The Company issued
During the nine months ended September 30, 2022, investors exercised
On September 11, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with Armistice Capital Master Fund Ltd.. Pursuant to the terms of the SPA, the Company agreed, at the closing of the SPA, to sell and issue to the Armistice Capital Master Fund Ltd. in a private placement
The warrants also allow for a “cashless exercise” if, at any time after the six (
The
These warrants remain outstanding as of September 30, 2022.
5. Balance Sheet Components
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2022 | | 2021 | ||
Prepaid operating expenses | | $ | | | $ | |
Rent deposit | |
| | |
| |
VAT receivable associated with SAIT | |
| | |
| |
Prepaid sponsorship | |
| | |
| |
Tax credit receivable | | | | | | |
Miscellaneous receivable | |
| | |
| |
Prepaid expenses and other current assets | | $ | | | $ | |
21
Capitalized internal-use software, net
Capitalized internal-use software, net consisted of the following:
|
| |
| | September 30, |
| December 31, | |
| | Useful Lives | | 2022 | | 2021 | ||
Internally developed software |
|
| $ | | | $ | | |
Less accumulated depreciation |
| |
| | ( | |
| ( |
Capitalized internal-use software, net | | | | $ | | | $ | |
Amortization expense is recognized on a straight-line basis and capitalized internal-use software amortization expense for the three months ended September 30, 2022, and 2021 totaled $
Property and equipment, net
Property and equipment, net consisted of the following:
|
| |
| | September 30, |
| December 31, | |
| | Useful Lives | | 2022 | | 2021 | ||
Computer equipment |
| - | | $ | | | $ | |
Furniture and fixtures |
| |
| | |
| | |
Mobile hardware | | | | | | | — | |
Property and equipment, gross | | | |
| | |
| |
Less accumulated depreciation | | | |
| ( | |
| ( |
Property and equipment, net | | | | $ | | | $ | |
Depreciation expense is recognized on a straight-line basis and property and equipment depreciation expense for the three months ended September 30, 2022, and 2021 totaled $
Other assets
Other assets consisted of the following:
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2022 | | 2021 | ||
Tax credit receivable | | $ | | | $ | |
Other assets | | $ | | | $ | |
Accrued expenses
Accrued expenses consisted of the following:
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2022 | | 2021 | ||
Compensation payable | | $ | | | $ | |
Commission liability | |
| | |
| — |
Accrued employee taxes | |
| | |
| |
Accrued mobile expenses | | | | | | — |
Other accrued liabilities | |
| | |
| |
Accrued expenses | | $ | | | $ | |
22
6. Goodwill, Digital Asset, and Intangible Assets
There were no changes in the carrying amount of goodwill for the periods ended September 30, 2022 and December 31, 2021.
On February 16, 2022, Metapresence Limited acquired digital assets including a plot of virtual land for $
Intangible assets consisted of the following:
|
| |
| September 30, |
| December 31, | ||
| | Useful Lives | | 2022 | | 2021 | ||
Patent application costs |
| | $ | | | $ | | |
Trade name and trademarks |
| |
| | |
| | |
Intangible assets, gross |
| | |
| | |
| |
Less: Accumulated amortization |
| | | | ( | | | ( |
Intangible assets, net | | | | $ | | | $ | |
Intangible asset amortization expense is recognized on a straight-line basis and intangible asset amortization expense for the three months ended September 30, 2022, and 2021 totaled $
Estimated future amortization expense of intangible assets is as follows:
Future Intangible Asset Amortization Expense |
| Amount | |
Remainder of 2022 | | $ | |
2023 | |
| |
2024 | |
| |
2025 | | | |
| | $ | |
7. Revenue Recognition
Remaining Performance Obligations
The Company’s arrangements with its customers often have terms that span over multiple years. However, the Company generally allows its customers to terminate contracts for convenience prior to the end of the stated term with less than twelve months’ notice. Revenue allocated to remaining performance obligations represents noncancelable contracted revenue that has not yet been recognized, which includes deferred revenue and, in certain instances, amounts that will be invoiced. The Company has elected the practical expedient allowing the Company to not disclose remaining performance obligations for contracts with original terms of twelve months or less. Cancelable contracted revenue, which includes customer deposit liabilities, is not considered a remaining performance obligation. As of September 30, 2022, and December 31, 2021 the Company does not have any related performance obligations for contracts with terms exceeding twelve months.
23
Disaggregation of Revenue
| | For the three months ended | | For the nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Professional services (over time) | | $ | | | $ | | | $ | | | $ | |
Termination expense reimbursement (one time) | | | | | | — | | | | | | — |
License fees (over time) | |
| | | | | | | | |
| |
Total net revenue | | $ | | | $ | | | $ | | | $ | |
8. Income Taxes
The Company computes its tax provision for interim periods by applying the estimated annual effective tax rate to year-to-date pre-tax income from recurring operations and adjusting for discrete tax items arising in that quarter.
The Company had an effective tax rate of
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Company’s past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies.
The Company had
It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The Company has not accrued any penalties related to uncertain tax positions due to offsetting tax attributes as of September 30, 2022, and December 31, 2021.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitation. The only material jurisdiction where the Company is subject to potential examination by tax authorities is the U.S. (federal and state) for tax years 2016 through 2021.
9. Net Loss per Share Attributable to Common Stockholders
The following table presents the calculation of basic and diluted net loss per share:
| | Three months ended | | | Nine months ended | |||||||
| | September 30, | | | September 30, | |||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Numerator: |
| |
|
| |
|
| |
|
| |
|
Net loss attributable to common stockholders | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
| | | | | | | | | | | | |
Denominator: | |
| | |
| | |
| | |
| |
Weighted average shares used in computing net loss per share attributable to common stockholders | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Net loss per share attributable to common stockholders | | ( | | ( | | ( | | ( | ||||
24
The following potentially dilutive securities were excluded from the computation of diluted net loss per share calculations for the periods presented because the impact of including them would have been anti-dilutive:
| | September 30, | | September 30, |
|
| 2022 |
| 2021 |
Options, RSUs, and grants | | | | |
Warrants | | | | |
Total dilutive securities | | | | |
10. Stock Awards and Stock-Based Compensation
From time to time, the Company may issue stock awards in the form of Class A Shares of Common Stock grants, Restricted Stock Units (RSUs), or Class A Shares of Common Stock options with vesting/service terms. Stock awards are valued on the grant date using the Company’s common stock share price quoted on an active market. Stock options are valued using the Black-Scholes-Merton pricing model to determine the fair value of the options. We generally issue our awards in terms of a fixed monthly value, resulting in a variable number of shares being issued, or in terms of a fixed monthly share number.
During the three and nine months ended September 30, 2022 and 2021, the Company entered into agreements with advisory board members and other external advisors to issue cash payments and stock awards in exchange for services rendered to the Company on a monthly basis. The total granted stock-based awards to advisory board members and other external advisors during the three months ended September 30, 2022, and 2021 included grants totaling, $
The total granted stock-based awards to advisory board members and other external advisors during the nine months ended September 30, 2022 and 2021 included grants totaling, $
In addition to issuing stock awards to advisory board members and other external advisors, during the three and nine months ended September 30, 2022, and 2021, the Company granted stock-based awards to multiple employees. The total granted stock-based awards to employees during the three months ended September 30, 2022, and 2021 included grants totaling, $
The total granted stock-based awards to employees during the nine months ended September 30, 2022, and 2021 included grants totaling, $
The following table summarizes stock option activity for the three and nine months ended September 30, 2022:
|
| |
|
| |
| Weighted |
|
| |
| | | | Weighted | | Average | | | | |
| | | | Average | | Remaining | | | | |
|
| Options |
| Exercise Price |
| Contractual |
| Aggregate | ||
|
| Outstanding |
| Per Share |
| Life (years) |
| Intrinsic Value | ||
Balance as of June 30, 2022 |
| | | $ | |
| | $ | | |
Options granted |
| | |
| |
| | |
| |
Options exercised |
| ( | |
| |
| | |
| |
Options canceled and forfeited |
| — | |
| — |
| | |
| |
Balance as of September 30, 2022 |
| | |
| |
| |
| | |
Options vested and exercisable as of September 30, 2022 |
| | | $ | |
| | $ | | |
25
| | | | | | | | | | |
|
| |
| | |
| Weighted |
| | |
| | | | Weighted | | Average | | | | |
| | | | Average | | Remaining | | | | |
| | Options | | Exercise Price | | Contractual | | Aggregate | ||
|
| Outstanding |
| Per Share |
| Life (years) |
| Intrinsic Value | ||
Balance as of January 1, 2022 | | | | $ | |
| | $ | | |
Options granted | | | | | |
| | | | |
Options exercised | | ( | | | |
| | | | |
Options canceled and forfeited | | — | | | — |
| | | | |
Balance as of September 30, 2022 | | | | | |
| | | | |
Options vested and exercisable as of September 30, 2022 | | | | $ | |
| | $ | | |
The aggregate intrinsic value of options outstanding, exercisable, and vested and exercisable is calculated as the difference between the exercise price of the underlying options and the fair value of the Company’s common stock. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2022 and 2021 is $
The weighted average grant-date fair value of options granted during the nine months ended September 30, 2022, and 2021 was $
As of September 30, 2022, the Company had
The following assumptions were used to calculate the fair value of options granted during the three and nine months ended September 30, 2022:
| | | | | | | |
|
| Three months ended |
| Nine months ended |
| ||
| | September 30, 2022 | | September 30, 2022 |
| ||
Fair value of Class A Shares of Common Stock | | $ | | $ | | ||
Exercise price | | $ | | $ | | ||
Risk free interest rate | |
| % |
| % | ||
Expected dividend yield | |
| % |
| % | ||
Expected volatility | |
| % |
| % | ||
Expected term | |
| |
| | ||
Stock-based compensation expense
Our consolidated statements of operations include stock-based compensation expense as follows:
|
| Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Cost of services | | $ | | | $ | | | $ | | | $ | |
Research and development | | | | | | | |
| | |
| |
Selling, general, and administrative | | | | | | | |
| | |
| |
Total stock-based compensation expense | | $ | | | $ | | | $ | | | $ | |
26
11. Related Party Transactions
Related party payables of $
A member of management provides legal services to the Company from a law firm privately owned and separate from the Company. Certain services are provided to the Company through this law firm. Total expenses incurred by the Company in relation to these services totaled $
The Company has agreed, with effect from November 13, 2020, to grant a
On August 16, 2017, the Company entered into three shareholder loan agreements with three related parties for $
12. Malta Grant
During July 2020 the Company entered into an agreement with the Republic of Malta that would provide for a grant of up to €
U.S. GAAP does not provide authoritative guidance regarding the receipt of economic benefits from government entities in return for compliance with certain conditions. Therefore, based on ASC 105-10-05-2, non-authoritative accounting guidance from other sources was considered by analogy in determining the appropriate accounting treatment, the Company elected to apply International Accounting Standards 20 – Accounting for Government Grants and Disclosure of Government Assistance and recognizes the expected reimbursements from the Republic of Malta as deferred income. As reimbursable operating expenses are incurred, a receivable is recognized (reflected within “prepaid expenses and other current assets” in the consolidated balance sheets) and income is recognized in a similar systematic basis over the same periods in the consolidated statements of operations. During the three months ended September 30, 2022 and 2021, the Company incurred $
On January 25, 2022, the Company entered into an additional agreement with the government of Malta for a grant of up to €
27
agreement that enables the Company to submit eligible employee expenses for reimbursement by October 31, 2022. During the three and nine months ended September 30, 2022, the Company incurred $
13. Commitments and Contingencies
Operating Leases – The Company leased office space in Georgia and certain other states in the U.S. under various operating lease arrangements, some of which are month-to-month lease arrangements, including several vehicles and corporate apartment leases requiring monthly payments. As of September 30, 2022, there were no minimum lease commitments related to month-to-month lease arrangements.
The following are the future minimum lease obligations on the Company’s lease agreements as of September 30, 2022:
Future Minimum Lease Obligations |
| | |
Remainder of 2022 | | $ | |
2023 | |
| |
2024 | |
| |
2025 | |
| |
2026 | |
| |
Total | | $ | |
Rental expense totaled $
Financial Liability Obligation - As of September 30, 2022, the Company’s financial liability totaled $
Future Financial Liability Obligations |
|
| |
Remainder of 2022 | | $ | |
2023 | |
| |
2024 | |
| |
Total | | $ | |
Litigation – The Company is not currently involved with and does not know of any pending or threatening litigation against the Company or any of its officers or directors in connection with its business
14. Subsequent Events
Subsequent events have been evaluated through November 10, 2022, the date these condensed consolidated financial statements were available to be issued.
On October 5, 2022, the Company received the Certificate of Strike Off from the Cayman Registrar of Companies, which represents the completion of administratively dissolving Trust Stamp Cayman. As there were no operations established under the entity, there is a limited impact to Trust Stamp. The dissolution of Trust Stamp Cayman will be effective December 30, 2022.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
T Stamp Inc. was incorporated on April 11, 2016 in the State of Delaware. T Stamp Inc. and its subsidiaries (“Trust Stamp”, “we”, or the “Company”) develops and markets identity authentication software for enterprise and government partners and peer-to-peer markets.
Trust Stamp develops proprietary artificial intelligence-powered identity and trust solutions at the intersection of biometrics, privacy, and cybersecurity, that enable organizations to protect themselves and their users, while empowering individuals to retain ownership of their identity data and prevent fraudulent activity using their identity.
Trust Stamp tackles industry challenges including data protection, regulatory compliance, and financial accessibility, with cutting edge technology including biometric science, cryptography, and machine learning. Our core technology irreversibly transforms identity information to create tokenized identifiers that enable accurate authentication without the need to store or share sensitive data. By retaining the usefulness of biometric-derived data while minimizing the risk, we allow businesses to adopt biometrics and other anti-fraud initiatives while protecting personal information from hacks and leaks.
Trust Stamp’s key sub-markets are identity authentication for the purpose of account opening, access and fraud detection, the creation of tokenized digital identities to facilitate financial and societal inclusion, and in-community case management software for alternatives to detention and other governmental uses.
As biometric solutions proliferate, so does the need to protect biometric data. Stored biometric images and templates represent a growing and unquantified financial, security and PR liability and are the subject of governmental, media and public scrutiny, since biometric data cannot be “changed” once they are hacked, as they are directly linked to the user’s physical features and/or behaviors. Privacy concerns around biometric technology have led to close attention from regulators, with multiple jurisdictions placing biometrics in a special or sensitive category of personal data and demanding much stronger safeguards around collection and safekeeping.
To address this unprecedented danger and increased cross-industry need to establish trust quickly and securely in virtual environments, Trust Stamp has developed its Irreversibly Transformed Identity Token, or IT2, solutions, which replace biometric templates with a cryptographic hash that can never be rebuilt into the original data and cannot be used to identify the subject outside the environment for which it is designed.
Trust Stamp’s data transformation and comparison technology is vendor and modality agnostic, allowing organizations including other biometric services providers to benefit from the increased protection, efficiency, and utility of our proprietary tokenization process. With online and offline functionality, Trust Stamp technology is effective in even the most remote locations in the world.
Trust Stamp also offers end-to-end solutions for multi-factor biometric authentication for account access and recovery, KYC/AML compliance, customer onboarding, and more, which allow organizations to approve more genuine users, keep bad actors from accessing systems and services, and retain existing users with a superior user experience. Management has evaluated the market potential for its services in part by reviewing the following reports, articles, and data sources, none of which were commissioned by the Company, and none are to be incorporated by reference:
29
Data security and fraud
| ● | In 2021, 4,145 publicly disclosed breaches exposed over 22 billion records according to the 2021 Year End Data Breach QuickView Report. |
| ● | eCommerce, airline ticketing, money transfer and banking services are estimated to cumulatively lose over $200 billion to online payment fraud between 2020 and 2024, according to a 2020 Juniper Research report on Online Payment Fraud. |
Biometric authentication
| ● | Juniper research estimates that biometrics will annually authenticate over $3 trillion in payment transactions by 2025. |
| ● | The global biometric system market is projected to grow from $24.1 billion in 2020 to $82.8 billion by 2027 according to a 2021 Global Industry Analysts, Inc report. |
Financial and societal inclusion
| ● | As of 2017, 1.7 billion people lacked basic financial services including a bank account, and 4 billion people were underbanked according to the World Bank Global Findex 2017 report. (NB. estimates for people lacking basic financial services are now closer to 1.4 billion people). |
| ● | More than 200 million small and medium-sized enterprises in emerging markets lack access to finance, limiting their ability to grow and thrive (UNGSA Financial Inclusion) |
| ● | The global market for Microfinance estimated at $156.7 Billion in the year 2020, is projected to reach $304.3 Billion by 2026 according to the Global Microfinance Market Report 2022. |
Alternatives to detention (“ATD”)
| ● | Addressing the House Appropriations Subcommittee for Homeland Security on May 17, 2022, ICE Acting Director stated that the financial year 2023 Budget submitted by ICE for approval included an additional $75,000,000 for the ATD program over and above the present appropriation and that ICE is “focusing on ATD” instead of more expensive physical detention programs; both because of the threat of COVID and because ATD is less expensive and more humane. |
| ● | On that same day, the Ranking Member of the Subcommittee shared that 230,000 participants are currently in the ATD program with a planned increase to 600,000 participants. |
| ● | The bipartisan Appropriations Committee has recommended a funding increase of $42,186,000 above the request made by ICE, for a total of $569,319,000 for financial year 2023 to fund increases in enrollments into the Alternative to Detention and Secure Docket programs, and case management services and participation. |
Our Customers and Business –
Trust Stamp’s key sub-markets are:
30
i) In parallel with our engagements with an S&P 500 bank and other financial and FinTech institutions, we continued to expand our work with Fidelity Information Services, LLC (“FIS”) with our proprietary tokenization technology being utilized in FIS’ new global identity authentication system. To date, two banks have committed to FIS pilots using Trust Stamp technology and it is anticipated that a number of additional banks will be onboarded into pilots by the end of 2022. The pilots utilize the Company’s next-generation identity package, offering rapid deployment across devices and platforms, with custom workflows that seamlessly orchestrate trust across the identity lifecycle for a consistent user experience in processes for onboarding and KYC/AML, multi-factor authentication, account recovery, fraud prevention, compliance, and more. The orchestration layer that has been developed facilitates no-code and low-code implementations of the Company’s technology making adoption faster and even more cost-effective for a broader range of potential customers.
ii) Under a ten-year technology services agreement (“the TSA”) with Mastercard International entered into in March 2019, the Company’s IT2 technology is being implemented by Mastercard for Humanitarian & Development purposes as a core element of its Community Pass and Inclusive Identity offerings. Use cases include not only financial services for individuals and businesses but also empowering people and communities to meet basic needs, such as nutritious food, clean water, housing, education, and healthcare including Ethiopia’s implementation of Mastercard’s Wellness Pass within Ethiopia’s health information system to promote efficiency in healthcare tracking and offline portability of health records.
Under the TSA, the Company is paid to develop and host software solutions utilizing the IT2 and to support Mastercard’s implementations. In addition, the Company is paid on a “per use” basis for all transactions utilizing its technology. To date the Company has received guaranteed minimum annual payments on account of usage but anticipates significant use-based revenue starting in 2023 and growing year-on-year thereafter.
iii) On September 23, 2021, the Company was awarded a contract with the US Department of Homeland Security, Immigration and Customs Enforcement Division (“ICE”). Effective March 27, 2022, Trust Stamp agreed to a bilateral modification (the “ICE Contract”) of that September 2021 contract. The modification covers software development and services related to rapid enrolment in the ICE Alternative to Detention Program increases the total contract award value to $7,176,364 from the original $3,920,764 and extends the delivery period until September 26, 2022. On August 17, 2022, Trust Stamp received notification from ICE that it was terminating the ICE Contract for convenience effective immediately. The Company anticipates significant ongoing growth opportunities for its software products in the Alternative to Detention Program and in the provision of other in-community case management services for federal and state agencies. Refer to the Liquidity and Capital Resources subsection below for an expanded discussion of the 90-day and 60-day cessation as well as termination of the ICE Contract.
In addition to its key sub-markets, the Company is developing products and working with partners and industry organizations in other sectors that offer significant market opportunities, in particular, the travel, healthcare, Metaverse platform and cryptographic key and account credential safekeeping sectors.
Key Business Measures
In addition to the measures presented in our consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions.
Adjusted EBITDA
This discussion includes information about Adjusted EBITDA that is not prepared in accordance with U.S. GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by U.S. GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.
Adjusted EBITDA is a non-GAAP financial measure that represents U.S. GAAP net income (loss) adjusted to exclude (1) interest expense, (2) interest income, (3) provision for income taxes, (4) depreciation and amortization, (5) changes in assets and liabilities, and (6) certain other items management believes affect the comparability of operating results.
31
Management believes that Adjusted EBITDA, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our Company and our management, and it will be a focus as we invest in and grow the business.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:
o | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments. |
o | Adjusted EBITDA does not reflect changes in, or cash requirements for our working capital needs. |
o | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
o | Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations. |
Due to these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement to our U.S. GAAP results.
Reconciliation of Net Loss to Adjusted EBITDA
| | Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net loss before taxes | | $ | (3,439,892) | | $ | (3,036,344) | | $ | (8,054,240) | | $ | (7,035,125) |
Add: Other expense | | | 7,484 | | | 49,178 | |
| 102,269 | |
| 85,217 |
Less: Other income | | | (3,546) | | | — | |
| (16,160) | |
| (10,865) |
Add: Interest expense (income) | | | 2,889 | | | 3,801 | |
| 9,202 | |
| 43,850 |
Add: Stock-based compensation | | | 850,801 | | | 892,898 | |
| 1,598,233 | |
| 1,722,936 |
Add: Impairment loss of digital assets | | | 1,260 | | | — | | | 25,144 | | | - |
Add: Non-cash expenses for in-kind services | | | 27,930 | | | 27,930 | |
| 83,790 | |
| 83,864 |
Add: Depreciation and amortization | | | 203,106 | | | 149,103 | |
| 547,737 | |
| 422,727 |
Adjusted EBITDA loss (non-GAAP) | | $ | (2,349,968) | | $ | (1,913,434) | | $ | (5,704,025) | | $ | (4,687,396) |
Adjusted EBITDA loss (non-GAAP) for the three months ended September 30, 2022, increased by 22.81%, to $2.35 million from $1.91 million for the three months ended September 30, 2021. The overall increase in adjusted EBITDA loss (non-GAAP) was driven primarily by an increase in selling, general and administrative expenses of $989 thousand and research and development expenses of $199 thousand and cost of services of $280 thousand during the three months ended September 30, 2022. See “Results of Operations” below for further discussion on the drivers behind the increase in gross margin and selling, general and administrative expenses during the three months ended September 30, 2022.
Adjusted EBITDA loss (non-GAAP) for the nine months ended September 30, 2022, increased by 21.69%, to $5.70 million from $4.69 million for the nine months ended September 30, 2021. The overall increase in adjusted EBITDA loss (non-GAAP) was driven by a $2.91 million increase in selling, general and administrative expenses, research and development expenses of $639 thousand, and cost of services of $718 thousand during the nine months ended September 30, 2022, offset by an increase in net revenues of $3.30 million during the nine months ended September 30, 2022. See “Results of Operations” below for further discussion on the drivers behind the increase in gross margin and selling, general and administrative expenses during the nine months ended September 30, 2022.
32
Gross revenue (non-GAAP)
This discussion includes information about gross revenue that is not prepared in accordance with U.S. GAAP. Gross revenue is not based on any standardized methodology prescribed by U.S. GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.
| | (Unaudited) | | (Unaudited) | ||||||||
| | Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net revenue | | $ | 1,348,478 | | $ | 330,104 | | $ | 4,877,809 | | $ | 1,581,796 |
Add back: | | | | | | | |
| | |
| |
Third party costs rebilled to clients | | | 62,500 | | | 50,000 | |
| 187,500 | |
| 150,000 |
Gross revenue (non-GAAP) | | $ | 1,410,978 | | $ | 380,104 | | $ | 5,065,309 | | $ | 1,731,796 |
Gross revenue for the three months ended September 30, 2022, increased 271.21% to $1.41 million compared to $380 thousand for the three months ended September 30, 2021. Gross revenues received in the three months ended September 30, 2022, included $63 thousand for the sale of outsourced web hosting services. See “Results of Operations” below for further discussion on the drivers behind the increase in net revenue during the three months ended September 30, 2022.
Gross revenue for the nine months ended September 30, 2022, increased 192.49% to $5.07 million compared to $1.73 million for the nine months ended September 30, 2021. Gross revenues received in the nine months ended September 30, 2022, included $188 thousand for the sale of outsourced web hosting services. Due to GAAP requirements, we did not include the third-party costs for web hosting in net revenue, but instead, reduced cost of services. See “Results of Operations” below for further discussion on the drivers behind the increase in net revenue during the nine months ended September 30, 2022.
33
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
The following table summarizes our condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021:
| | For the three months ended | | For the nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net revenue | | $ | 1,348,478 | | $ | 330,104 | | $ | 4,877,809 | | $ | 1,581,796 |
Operating Expenses: | |
| | |
| | |
| | |
| |
Cost of services (exclusive of depreciation and amortization shown separately below) | |
| 529,023 | |
| 249,357 | |
| 1,571,166 | |
| 853,370 |
Research and development | |
| 777,800 | |
| 578,763 | |
| 1,766,164 | |
| 1,126,914 |
Selling, general, and administrative | |
| 3,281,661 | |
| 2,292,182 | |
| 9,014,894 | |
| 6,102,937 |
Depreciation and amortization | |
| 203,106 | |
| 149,103 | |
| 547,737 | |
| 422,727 |
Total Operating Expenses | |
| 4,791,590 | |
| 3,269,405 | |
| 12,899,961 | |
| 8,505,948 |
Operating Loss | |
| (3,443,112) | |
| (2,939,301) | |
| (8,022,152) | |
| (6,924,152) |
Non-Operating Income (Expense): | |
| | |
| | |
| | |
| |
Interest income (expense) | |
| (2,889) | |
| (3,801) | |
| (9,202) | |
| (43,850) |
Change in fair value of warrant liability | |
| 11,307 | |
| (54,372) | |
| 88,367 | |
| (54,372) |
Grant income | |
| — | |
| 10,308 | |
| — | |
| 61,601 |
Impairment of digital assets | | | (1,260) | | | — | | | (25,144) | | | — |
Other income | |
| 3,546 | |
| — | |
| 16,160 | |
| 10,865 |
Other expense | |
| (7,484) | |
| (49,178) | |
| (102,269) | |
| (85,217) |
Total Other Income (Expense), Net | |
| 3,220 | |
| (97,043) | |
| (32,088) | |
| (110,973) |
Net loss before Taxes | |
| (3,439,892) | |
| (3,036,344) | |
| (8,054,240) | |
| (7,035,125) |
Income tax expense | |
| — | |
| — | |
| — | |
| — |
Net loss including noncontrolling interest | |
| (3,439,892) | |
| (3,036,344) | |
| (8,054,240) | |
| (7,035,125) |
Net loss attributable to noncontrolling interest | |
| — | |
| (440) | |
| — | |
| (1,304) |
Net loss attributable to T Stamp Inc. | | $ | (3,439,892) | | $ | (3,035,904) | | $ | (8,054,240) | | $ | (7,033,821) |
Basic and diluted net loss per share attributable to T Stamp Inc. | | $ | (0.15) | | $ | (0.16) | | $ | (0.35) | | $ | (0.37) |
Weighted-average shares used to compute basic and diluted net loss per share | |
| 23,467,324 | |
| 19,358,016 | |
| 23,163,414 | |
| 18,847,797 |
Comparison of the Three Months Ended September 30, 2022 and 2021
Net revenue
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Net revenue | | $ | 1,348,478 | | $ | 330,104 | | $ | 1,018,374 |
| 308.50 | % |
Net revenue increased by $1.02 million, or 308.50% during the three months ended September 30, 2022, and consisted of $844 thousand from ICE, $198 thousand from Mastercard, $241 thousand from a S&P500 bank, and the remaining $66 thousand from various other customers.
During the three months ended September 30, 2022, the Company implemented its "Orchestration Layer" platform with two new customers through its partnership with FIS. This platform is designed to provide easy integration with and access to Trust Stamp's products, chargeable on a per use basis. Additionally, during the three months ended September 30, 2022, $133 thousand in revenue was generated from a new statement of work (“SOW”) with Mastercard with a total contract value of $390 thousand.
34
The majority of revenue during the three months ended September 30, 2022 is a result of the ICE Contract including $124 thousand, derived from the remaining of the $325 thousand billed for the pro rata 18-day (March 27, 2022 – April 14, 2022) period from the contract modification which was valued at $3.25 million and executed on April 4, 2022. The Company recognized the other $201 thousand for the 18-day pro rata period during the three months ended June 30, 2022. Upon termination, the Company proposed to ICE for reimbursement of the reasonably unavoidable costs which the Company incurred during the pause period (April 15, 2022 – August 17, 2022) for a total of $720 thousand which included expenses such as payroll, mobile carrier costs, storage, and other costs related to the ICE contract. ICE agreed to the proposal and the Company subsequently invoiced the entire amount. Refer to the Liquidity and Capital Resources subsection below for an expanded discussion of the 90-day and 60-day cessation as well as termination of the ICE Contract.
Cost of services
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Cost of services | | $ | 529,023 | | $ | 249,357 | | $ | 279,666 | | 112.15 | % |
Cost of services (“COS”) increased by $280 thousand or 112.15% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The increase was driven primarily by $264 thousand in mobile carrier costs related to servicing requirements from the ICE modification contract, which was not incurred during the three months ended September 30, 2021. Furthermore, we incurred $62 thousand more in web hosting charges during the three months ended September 30, 2022, both internally and with our customers, which was driven by additional customer implementations and usage. Web hosting costs totaled $220 thousand during the three months ended September 30, 2022, of which $105 thousand was invoiced to our customers, compared to the three months ended September 30, 2021, which had $133 thousand in web hosting charges and $80 thousand invoiced to customers.
The COS increases for the three months ended September 30, 2022 were offset by a $30 thousand decrease in stock-based compensation and a $21 thousand decrease in internal COS for the three months ended September 30, 2022 despite new customer implementations of the Orchestration Layer, a feature of the platform's easy integration design.
Gross profit during the comparative periods increased significantly by 914.84% or $739 thousand from $81 thousand for the three months ended September 30, 2021, to $819 thousand for the three months ended September 30, 2022. Gross margins improved by 36.31% from 24.46% for the three months ended September 30, 2021, to 60.77% for the three months ended September 30, 2022.
Research and development
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Research and development | | $ | 777,800 | | $ | 578,763 | | $ | 199,037 |
| 34.39 | % |
Research and development (“R&D”) expense increased by $199 thousand, or 34.39% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The increase in R&D expense during the three months ended September 30, 2022 was driven by an increase in R&D expenses related to additional employees hired which did not exist during the three months ending September 30, 2021. Comparing the three months ended September 30, 2021 to the three months ended September 30, 2022, the Company grew its R&D team from 51 to 64 full-time equivalents (“FTE”).
Selling, general, and administrative
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Selling, general, and administrative | | $ | 3,281,661 | | $ | 2,292,182 | | $ | 989,479 |
| 43.17 | % |
Selling, general, and administrative expense (“SG&A”) increased by $989 thousand, or 43.17% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The increase in SG&A expense during the three months ended September 30, 2022 was driven mostly by the $369 thousand increase from mobile carrier costs during the period after the termination of the ICE Contract.
35
Additionally, during the three months ended September 30, 2022, there was a $129 thousand or 118.72% increase in legal, professional, and consulting services fees related to a variety of legal, financial, and human resource consulting services. Also related to human resources was a $108 thousand redundancy payment for employees in our U.K. office.
During the three months ended September 30, 2022, there was also a $92 thousand increase in SG&A from $25 thousand to $117 thousand from corporate and commercial travelling costs related to industry events, meetings with prospective customers, and investor conferences.
Finally, the remainder of the increase in SG&A expenses from the three months ended September 30, 2021 to the three months ended September 30, 2022 was driven mostly was driven mostly by the increase in SG&A FTE and associated overhead.
Depreciation and amortization
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Depreciation and amortization | | $ | 203,106 | | $ | 149,103 | | $ | 54,003 |
| 36.22 | % |
Depreciation and amortization (“D&A”) increased by $54 thousand, or 36.22% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The primary increase in D&A expense during the three months ended September 30, 2022 is $30 thousand for the depreciation of mobile hardware assets. There were no mobile hardware assets or related depreciation expense during the three months ended September 30, 2021.
Also driving the increase is the capitalized internal-use software depreciation expense due to a significant portion of lower allocations of capitalized internal-use software, specifically from the years ended December 31, 2016 and 2017, reaching the completion of their 5 year useful lives. The lower allocations are being replaced by larger allocations of capitalized internal-use software, specifically from years ended December 31, 2018 through 2022, resulting in increased depreciation. For instance, the average monthly capitalization of internal-use software added during the year ended December 31, 2017 was $23 thousand compared to $40 thousand for the capitalization of internal-use software added during the year ended December 31, 2021.
We continue to see a trend of increasing software capitalization. The development of new software has resulted in additional capitalized internal-use software amortization, or microservices, that once reaching technical feasibility, the Company begins to capitalize and subsequently amortize the related costs over a period of 5 years.
In addition, patent amortization increased during the three months ended September 30, 2022 as a result of new pending patent applications and issued patents with the United States Patent and Trademark Office. During the nine months ended September 30, 2022, the Company added twelve new pending patents and eight issued patents.
Operating loss
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Operating loss | | $ | (3,443,112) | | $ | (2,939,301) | | $ | (503,811) |
| 17.14 | % |
Operating loss increased by $504 thousand, or 17.14% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The primary reason for the increase in operating loss was the growth in SG&A, COS, D&A and R&D expenses during the three-months ended September 30, 2022, compared to the three months ended September 30, 2021.
While total operating costs, including COS, R&D, D&A, and SG&A, increased by 46.56% or $1.52 million, it took only $3.55 to produce $1.00 in net revenue in the three months ended September 30, 2022, versus $9.90 in total operating expense to produce $1.00 in net revenue in the three months ended September 30, 2021; an improvement of 64.12% and an indicator of better operating efficiencies during the comparative periods.
36
Interest income (expense)
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Interest income (expense) | | $ | (2,889) | | $ | (3,801) | | $ | 912 |
| 23.99 | % |
Interest income (expense) decreased by $912, or 23.99% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. During the three months ending September 30, 2022, there was $1 thousand and $4 thousand of interest income and interest expense, respectively. During the three months September 30, 2021, there $4 thousand of interest expense. All interest earned and expensed during the comparative periods were a result of standard operating activities.
Change in fair value of warrant liability
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Change in fair value of warrant liability | | $ | 11,307 | | $ | (54,372) | | $ | 65,679 |
| 120.80 | % |
The Company recognized a change in fair value of warrant liability during the three months ended September 30, 2022, of $11 thousand based on the fair value assessment and adjustment for one warrant liability as described in Note 4 to the financial statements provided under Item 1 of this report.
Grant income
| | Three months ended September 30, | |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change | |||
Grant income | | $ | — | | $ | 10,308 | | $ | (10,308) |
| — |
Grant income during the three months ended September 30, 2021 relates to the Business Development and Continuity Scheme secured by the Company’s subsidiary, Trust Stamp Malta. This agreement with the Republic of Malta is described in more detail in Note 12 to the financial statements, provided under Item 1 of this report. During the three months ended September 30, 2022 there was no grant income recorded.
Impairment of digital assets
|
| Three months ended September 30, | |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change | |||
Impairment of digital assets | | $ | (1,260) | | $ | — | | $ | (1,260) |
| — |
The Company recognized an impairment on digital assets during the three months ended September 30, 2022 of $1 thousand. Digital assets are considered indefinite-lived intangible assets under applicable accounting rules. Accordingly, any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition requires recognition of impairment.
Other income
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Other income | | $ | 3,546 | | $ | — | | $ | 3,546 |
| 100 | % |
Other income increased by $4 thousand for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The other income increase was primarily due to miscellaneous income from GAAP entries.
37
Other expense
| | Three months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Other expense | | $ | (7,484) | | $ | (49,178) | | $ | 41,694 |
| -84.78 | % |
Other expense decreased by $42 thousand for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The Company recorded $48 thousand in unrealized exchange losses during the three months ended September 30, 2021.
During the six months ended June 30, 2022, the Company determined that there is currently no intention to settle intercompany accounts in the foreseeable future; therefore, future fluctuations in foreign currencies between the Company and its subsidiaries will be booked to accumulated other comprehensive income on the balance sheet.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Net revenue
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $Change |
| % Change |
| |||
Net revenue | | $ | 4,877,809 | | $ | 1,581,796 | | $ | 3,296,013 |
| 208.37 | % |
During the nine months ended September 30, 2022, net revenue increased by $3.30 million, or 208.37% compared to the nine months ended September 30, 2021, and consisted of $3.29 million from ICE, $536 thousand from Mastercard, $791 thousand from a S&P500 bank, and the remaining $266 thousand from various other customers.
During the period, the Company implemented its "Orchestration Layer" platform with two new customers through its partnership with FIS. This platform is designed to provide easy integration with and access to Trust Stamp's products, chargeable on a per use basis. Additionally, $337 thousand in revenue was generated from a new statement of work (“SOW”) with Mastercard with a total contract value of $390 thousand.
The majority of revenue during the period came from the ICE Contract for an alternative to detention program which was subsequently modified to $7.18 million, effective March 27, 2022. During the nine months ended September 30, 2022, the Company booked $3.29 million related to the ICE Contract. Refer to the Liquidity and Capital Resources subsection below for an expanded discussion of the 90-day and 60-day cessation as well as termination of the ICE Contract.
Cost of services
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Cost of services | | $ | 1,571,166 | | $ | 853,370 | | $ | 717,796 |
| 84.11 | % |
Cost of services provided increased by $718 thousand, or 84.11% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase during the nine months ended September 30, 2022 was primarily driven by the ICE Contract which the Company executed during the nine months ended September 30, 2021 and was subsequently modified effective March 27, 2022. During the nine months ended September 30, 2022, the Company booked $802 thousand in labor and third-party carrier costs related to servicing the requirements of the ICE Contract. During the nine months ended September 30, 2022, web services also increased by $149 thousand due to an increase in the level of services provided to customers and an increase in usage by customers. The increases were offset by a decrease of $107 thousand in stock-based compensation as well as $108 thousand in costs to service the FIS contract that did not recur in the nine months ended September 30, 2022.
38
Additionally, gross profit during the comparative periods increased significantly by 353.94% or $2.58 million from $728 thousand for the nine months ended September 30, 2021, to $3.31 million for the nine months ended September 30, 2022. Gross margins improved by 21.74% from 46.05% for the nine months ended September 30, 2021, to 67.79% for the nine months ended September 30, 2022.
Research and development
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Research and development | | $ | 1,766,164 | | $ | 1,126,914 | | $ | 639,250 |
| 56.73 | % |
Research and development (“R&D”) increased by $639 thousand, or 56.73% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase in R&D expenses during the nine months ended September 30, 2022, was driven by an increase in R&D activities related to the ICE contract which did not exist until the end of the three months ending September 30, 2021, and was therefore immaterial. This increase was offset by a decrease of $164 thousand in stock-based compensation during the nine months ended September 30, 2022. Comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2022, the Company grew its R&D team from 51 to 64 full-time equivalents (“FTE”) by adding $260 thousand in compensation costs which is a 32.68% increase between the comparison periods.
Selling, general, and administrative
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Selling, general, and administrative | | $ | 9,014,894 | | $ | 6,102,937 | | $ | 2,911,957 |
| 47.71 | % |
Selling, general, and administrative expense (“SG&A”) increased by $2.91 million, or 47.71% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase during the nine months ended September 30, 2022 was driven mostly by the $763 thousand increases in legal and professional services fees and other fees related to the listing of the Company’s Class A Common stock on the Nasdaq Capital Market.
Additionally, the Company incurred $433 thousand in sales commissions in the nine months ended September 30, 2022 compared to $48 thousand during the nine months ended September 30, 2021; an increase of $384 thousand or 792.39%. The increase in commissions paid during the nine months ended September 30, 2022 is directly related to the substantial increase in cash received on revenue contracts during the comparative periods, and include commissions paid on the customer contracts with ICE, FIS, and others.
Other notable variances during the nine months ended September 30, 2022 include a $369 thousand increase in mobile carrier costs during the nine months ended September 30, 2022 incurred after the termination of the ICE revenue contract. Additionally, there were $330 thousand in total compensation costs during the nine months ended September 30, 2022, from corporate and commercial travelling which is an 18.01% or $242 thousand increase from $88 thousand during the nine months ended September 30, 2021.
The remainder of the increase in SG&A expenses from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 was driven mostly by the increase in SG&A FTE and associated overhead.
Depreciation and amortization
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Depreciation and amortization | | $ | 547,737 | | $ | 422,727 | | $ | 125,010 |
| 29.57 | % |
Depreciation and amortization (“D&A”) increased by $125 thousand, or 29.57% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The primary increase in D&A expense during the nine months ended September 30, 2022 is $60 thousand for the depreciation of mobile hardware assets. There were no mobile hardware assets or related depreciation expense during the nine months ended September 30, 2021.
39
Also driving the increase is the capitalized internal-use software depreciation expense due to a significant portion of lower allocations of capitalized internal-use software, specifically from the years ended December 31, 2016 and 2017, reaching the completion of their 5 year useful lives. For instance, the average monthly capitalization of internal-use software added during the year ended December 31, 2017 was $23 thousand compared to $40 thousand for the capitalization of internal-use software added during the year ended December 31, 2021.
We continue to see a trend of increasing software capitalization. The development of new software has resulted in additional capitalized internal-use software amortization, or microservices, that once reaching technical feasibility, the Company begins to capitalize and subsequently amortize the related costs over a period of 5 years.
In addition, patent amortization increased during the three months ended September 30, 2022 as a result of new pending patent applications and issued patents with the United States Patent and Trademark Office. During the nine months ended September 30, 2022, the Company added twelve new pending patents and eight issued patents.
Operating loss
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Operating loss | | $ | (8,022,152) | | $ | (6,924,152) | | $ | (1,098,000) |
| 15.86 | % |
Operating loss increased by $1.1 million, or 15.86% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to an increase in SG&A, COS, and R&D expenses.
Interest income (expense)
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Interest income (expense) | | $ | (9,202) | | $ | (43,850) | | $ | 34,648 |
| 79.01 | % |
Interest income (expense) increased by $35 thousand, or 79.01% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The decrease was driven due to the Company paying off its venture loan with Second Century Ventures (“SCV”) in April 2021. The remaining net interest expense relates to various immaterial interest-bearing and interest-earning accounts.
During the nine months ending September 30, 2022, there was $3 thousand and $12 thousand of interest income and expense, respectively. During the nine months ending September 30, 2021, there was $1 thousand and $45 thousand of interest income and expense, respectively. All interest, other than that related to the SCV venture loan, earned and expensed during the comparative periods were a result of standard operating activities.
Change in fair value of warrant liability
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Change in fair value of warrant liability | | $ | 88,367 | | $ | (54,372) | | $ | 142,739 |
| 262.52 | % |
The Company recognized a change in fair value of warrant liability during the nine months ended September 30, 2022, of $88 thousand based on the fair value assessment and adjustment for one warrant liability as described in Note 4 to the financial statements provided under Item 1 of this report.
Grant income
|
| Nine months ended September 30, | | |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change | | |||
Grant income | | $ | — | | $ | 61,601 | | $ | (61,601) |
| (100) | % |
40
Grant income during the nine months ended September 30, 2021, relates to $62 thousand received in grant income that the Company’s subsidiary, Trust Stamp Malta, entered with the Republic of Malta that would provide for a grant of up to €200 thousand as reimbursement for operating expenses over the first 12 months following incorporation in the Republic of Malta with the Republic of Malta described in Note 12 to the financial statements provided under Item 1 of this report. During the nine months ended September 30, 2022, there was no grant income recorded.
Impairment of digital assets
|
| Nine months ended September 30, | |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change | |||
Impairment of digital assets | | $ | (25,144) | | $ | — | | $ | (25,144) |
| — |
The Company recognized an impairment on digital assets during the nine months ended September 30, 2022, of $25 thousand. Digital assets are considered indefinite-lived intangible assets under applicable accounting rules. Accordingly, any decrease in their fair values below our carrying values for such assets at any time after their acquisition requires recognition of impairment.
Other income
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Other income | | $ | 16,160 | | $ | 10,865 | | $ | 5,295 |
| 48.73 | % |
Other income increased by $5 thousand or 48.73% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase consists primarily of miscellaneous income from GAAP entries.
Other expense
|
| Nine months ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Other expense | | $ | (102,269) | | $ | (85,217) | | $ | (17,052) |
| (20.01) | % |
Other expense increased by $17 thousand or 20.01%% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase was primarily due to an unrealized loss on foreign currency translations for intercompany transactions between the parent company, T Stamp Inc., and its subsidiary, Trust Stamp Malta Limited with currencies denominated in United States Dollars and European Union Euros, respectively.
During the nine months ended September 30, 2021, there was an unrealized loss on foreign currency translations that is recorded to other income for foreign currencies held by the Company’s subsidiaries to meet expenses denominated in those currencies, the U.S. dollar cost of which expenses has fallen commensurately, therefore the unrealized loss will have no cash impact until the accounts are settled.
During the nine months ended September 30, 2022, the Company determined that there is currently no intention to settle intercompany accounts in the foreseeable future; therefore, future fluctuations in foreign currencies between the Company and its subsidiaries will be booked to accumulated other comprehensive income on the balance sheet.
Liquidity and Capital Resources
As of September 30, 2022 and December 31, 2021, we had approximately $2.93 million and $3.48 million cash in our banking accounts, respectively. The decrease of $545 thousand in cash from December 31, 2021 to September 30, 2022 was a result of the net negative cash inflow from the combination of financing and operating activities. During the nine months ended September 30, 2022, contributors to the cash outflows from operations include $499 thousand for AT&T carrier fees, $426 thousand in sales commissions, $200 thousand NASDAQ listing fee, $468 thousand in a cash bonus to meet the Company’s commitment to pay taxes on behalf of employees for their 2019 stock bonuses, $240 thousand to the Disney Institute for management consulting, and other normal operating activities.
41
Total current assets for the comparative periods decreased by 17.30% or $997 thousand from $5.76 million as of December 31, 2021, to $4.77 million during the nine months ended September 30, 2022. The current assets decrease was primarily driven by the decrease in cash (discussed above) and $517 thousand decrease in prepaid expenses and other current assets. Additionally, there was an increase in total current liabilities of 29.81% or $715 thousand, from $2.40 million at December 31, 2021 to $3.12 million as of September 30, 2022. In effect, the Company’s current ratio, that is, the ratio of the Company’s total current assets as a multiple of total current liabilities or the Company’s ability to service its current liabilities with its current cash assets, changed from 2.40 as of December 31, 2021, to 1.53 as of September 30, 2022. The change in current ratio is mostly a result of the $1.1 million increase in deferred revenue primarily related to the addition of $1.50 million received for a new 12-year revenue contract that the Company executed towards the end of the nine months ended September 30, 2022. See note 1 to the financial statements provided under Item 1 of this report for more details.
The receipt of cash as prepayment on various revenue contracts and resulting deferred revenue entry was the main driver for the increase in current liabilities as of September 30, 2022 compared to December 31, 2021. Various SOWs that accrued deferred revenue as of September 30, 2022, including $1.50 million received for a new 12-year revenue contract, $63 thousand received in cash in relation to the Mastercard License fee, and $13 thousand for FIS. Customer deposit liabilities as of December 31, 2021, included deferred revenue related to the ICE Contract. Since there is a provision in government contracts which provides for termination on convenience, the Company reclassed this amount to customer deposit liabilities. During the nine months ended September 30, 2022, the Company converted this entire balance to recognized revenue.
Effective September 3, 2019, the Company entered into a software license agreement with a customer pursuant to which the Company received total fees of $150 thousand in 2020, $200 thousand in 2021, and will receive minimum total fees of $250 thousand in 2022, rising by 15% in each subsequent year beginning in 2023 with a cap of $1.00 million. The Company has recognized $188 thousand of the software license agreement fees during the nine months ended September 30, 2022.
On March 12, 2021, the Company launched a Regulation D raise limited to accredited investors for a maximum of $5.00 million or 1,633,986 shares. The raise was marketed only to the Company’s existing investor email list with an initial minimum investment of $25 thousand and a share price of $3.06 per share. The initial tranche of the round closed on April 5, 2021, with $3.9 million of reserved investment with the contracted sale of 1,279,825 shares of Class A Common Stock. After the initial tranche, on April 6, 2021, the Company then offered up to $700 thousand or 182,291 of additional shares, again only to accredited investors, with a $5 thousand minimum investment and at a share price of $3.84 per share. The second tranche of the round closed on June 4, 2021 with $82 thousand of reserved investment at $3.84 per share with the contracted sale of 21,400 shares of Class A Common Stock.
On August 25, 2021, the Company launched concurrent offerings under Regulation Crowdfunding (“Regulation CF”), Regulation D and Regulation S. The Company initially sought to raise up to $5.00 million in the aggregate between the three offerings through the sale of units but had the discretion to accept up to $5.00 million in each offering. Each unit consists of 1 share of the Company’s Class A Common Stock, par value $0.01 per share, and 1 warrant to purchase 1 share of Class A Common Stock of the Company in a future registered or exempt offering of the Company (i.e. a Regulation CF, Regulation D, or Regulation S Warrant, as applicable). The minimum target amount under the Regulation CF offering was $100 thousand, which the Company achieved.
On November 19, 2021, we closed the Regulation CF offering, having received binding commitments for 1,250,000 units at $4.00 per unit for a total of $5,000,000 in gross proceeds. We continued to hold closings on investments from investors who subscribed prior to November 19, 2021. We raised a final total of $4,551,900 in gross proceeds from the issuance of 1,137,975 Regulation CF units to investors in this offering.
On August 25, 2022, we refunded $5,000 in Regulation CF Units to two investors. We raised a final total of $4,546,900 in gross proceeds from the issuance of 1,136,725 Regulation CF units to investors in this offering.
On December 21, 2021, REach® executed a Notice of Exercise for its warrants to purchase 400,641 shares of Class A Common Stock at an exercise price of $0.1664 per share for a total purchase price of $67 thousand.
On December 21, 2021, a SCV executed a Notice of Exercise for certain of its warrants to purchase 2,037,560 shares of Class A Common Stock at an exercise price of $1.6000 per share for a total purchase price of $3.3 million.
42
On January 7, 2022, we closed on an initial tranche of investments from the Regulation D offering. We raised a final total of $863,956 in gross proceeds from the issuance of 215,989 Regulation D units to investors in this offering. We conducted an additional close on February 2, 2022, receiving gross proceeds of $100,000 and issuing 25,000 Regulation D units to that investor.
On January 7, 2022, we closed the Regulation S offering. We raised a final total of $224,416 in gross proceeds from the issuance of 56,104 Regulation S units to investors in this offering.
On January 26, 2022, we initially qualified an offering with the Securities and Exchange Commission under Regulation A to allow for the exercise of warrants issued pursuant to the Regulation CF, Regulation D, and Regulation S unit offerings. As of September 30, 2022, warrants for 14,250 shares have been exercised for $57 thousand by investors.
On September 23, 2021, the Company was awarded a $3,920,764 contract with ICE (the “ICE Contract”).
Executed on April 5, 2022, and made effective March 27, 2022, Trust Stamp agreed to a modification of the ICE Contract, increasing the total contract award value to $7,176,364 from the original $3,920,764 and extending the delivery period until September 26, 2022 (subject to a right of early termination by ICE). However, due to a recent change in legislation (enacted through H.R. 2471: Consolidated Appropriations Act, 2022) which requires a Congressional notification in order for ICE to award a contract or subcontract to a particular entity for any pilot or demonstration program that uses more than 5 full-time equivalents or costs in excess of $1,000,000, effective April 15, 2022, the Company entered into an Amendment with ICE to amend the terms of the ICE Contract, implementing an up to 90-day cessation of performance of the Company’s and ICE’s obligations under the ICE Contract. This change in legislation was retroactively applied to the March 27, 2022, modification to the ICE Contract. The up to 90-day cessation of the ICE Contract provided by the Amendment was intended to allow ICE ample time to complete a Congressional notification for the modification of the ICE Contract, so that the Company could continue to provide services to ICE under the ICE Contract. However, as of July 15, 2022 (the end of the 90-day cessation period), ICE had not yet been able to complete such a Congressional notification.
On July 15, 2022, the Company entered into a second amendment agreement with ICE to amend the terms of the ICE Contract (as modified on March 27, 2022. The second amendment had the effect of implementing an additional up to 60-day cessation of performance of the Company’s and ICE’s obligations under the ICE Contract previously agreed to be performed between March 27, 2022, and September 26, 2022. Furthermore, this second amendment was intended to provide ICE additional time to complete such a Congressional notification, so that the Company could continue to provide services to ICE under the ICE Contract. During the cessation period, Trust Stamp continued to incur maintenance costs specific to the April 5, 2022 modification contract, without recognizing or receiving the revenue, in order that we could be positioned to restart immediately if and when the cessation was lifted.
On August 17, 2022, Trust Stamp received notification from ICE that it was terminating the ICE Contract for convenience effective immediately. ICE has paid Trust Stamp for the ICE Contract services performed prior to the amendment effective April 15, 2022. Additionally, Trust Stamp has received written notice that ICE will pay $720 thousand in cancellation expenses incurred during the period between April 15, 2022 and August 17, 2022 for mobile service expense, storage expense, and payroll expense. The Company expects that human resources costs – i.e., compensation for new and existing officers, directors, and employees – will be the largest material cash obligation for the Company within the next twelve months, with projected human resources costs totaling approximately $639 thousand per month, a reduction from $750 thousand per month as reported as of March 31, 2022. The Company believes, as described above, that revenues from its existing operations will be sufficient to cover these costs, and that any funds from new client contracts or offerings would provide additional operational capacity for the Company going forward.
On September 11, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with Armistice Capital Master Fund Ltd. Pursuant to the terms of the SPA, the Company agreed, at the closing of the SPA, to sell and issue to Armistice Capital Master Fund Ltd. in a private placement 975,000 shares of Class A Common Stock of the Company and warrants to purchase 1,950,000 shares of Class A Common Stock of the Company for a total purchase price of $1,511,250. Trust Stamp received the $1,511,250 payment during the nine months ended September 30, 2022 and issued the 975,000 shares of Class A Common Stock and 1,950,000 warrants to purchase shares of Class A Common Stock on September 14, 2022. A Form D related to this sale was filed on September 16, 2022.
On September 15, 2022, the Company entered into a Master Services Agreement (“the MSA”) with Innovative Government Solutions ("IGS") under which the Company and IGS will jointly offer services and IGS is granted a 12-year (renewable) license (“the license”) to resell the Company’s technology subject to payment by IGS of agreed revenue advances and end user license fees. On execution of the MSA, IGS agrees to pay $1,500,000 to the Company as a non-refundable revenue advance, an additional $1,500,000 non-refundable
43
revenue advance on the first anniversary of the MSA, and $1,000,000 on each of the next two anniversaries of the MSA as additional non-refundable revenue advances. IGS has the right to terminate the MSA for convenience before the additional non-refundable revenue advances become due in which case the unpaid additional non-refundable revenue advances will not be payable and the license will terminate. During the nine months ended September 30, 2022, Trust Stamp received the initial $1.5 million payment, recorded the non-refundable revenue advance to deferred revenue, and recognized no IGS revenue.
Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a business that has not yet generated profits, with a loss in the nine months ended September 30, 2022 of $8.05 million, operating cash outflows of $4.84 million for the same period, and an accumulated deficit of $35.26 million as of September 30, 2022.
The Company’s ability to continue as a going concern in the next twelve months following the date the consolidated financial statements were available to be issued is dependent upon its ability to produce revenues and/or obtain financing sufficient to meet current and future obligations and deploy such to produce profitable operating results. Refer to Revenue Recognition in Note 1 to the consolidated financial statements included under Item 1 for an expanded discussion of the 90-day cessation, subsequent 60-day cessation, and eventual termination of the ICE renewal. Management has evaluated these conditions and plans to generate revenue and raise capital as needed to satisfy its capital needs. While the negotiation of significant additional revenue is well advanced, it has not reached a stage that allows it to be factored into a going concern evaluation. In addition, although the Company has previously been successful in raising capital as needed and has already made plans to do so as well as restructuring expenses to meet the Company’s cash needs, no assurance can be given that the Company will be successful in its capital raising efforts. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.
Equity, Notes, and Warrants
Regulation D, Regulation S and Regulation CF Offerings. See more information on Regulation D, Regulation S, and Regulation CF fundraising efforts, as well as exercise of warrants by existing warrant holders of the Company, in the Liquidity and Capital Resources subsection above.
Armistice Capital Master Fund Ltd. Securities Purchase Agreement. See more information on the Securities Purchase Agreement with Armistice Capital Master Fund Ltd. in the Liquidity and Capital Resources subsection above.
Operating Activities
Net cash used in operating activities decreased by 8.15% from $5.27 million for the nine months ended September 30, 2021 to $4.84 million for the nine months ended September 30, 2022. Of the $8.05 million net loss for the nine months ended September 30, 2022, there was a non-cash expense of $1.60 million related to an accounting estimate used to calculate stock-based compensation, decrease in warrant liability of $88 thousand, repayment of shareholder loan through in-kind services of $84 thousand, digital asset impairment of $25 thousand, and $548 thousand for depreciation and amortization that was added back to net loss. Additionally, $1.05 million from the timing of accrual was subtracted from net loss to arrive at a $4.84 million cash outflow from operating activities.
44
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2022 was $735 thousand, compared to net cash of $632 thousand used in the nine months ended September 30, 2021. Cash used in investing activities for the nine months ended September 30, 2022 and 2021 were related primarily to continued investments to develop future technologies that we intend to capitalize and monetize over time. During the nine months ended September 30, 2022, capitalized internal-use software increased by 59.85% compared the nine months ended September 30, 2021. This is also a result of the Company’s investments in R&D, which, during the nine months ended September 30, 2022, produced twelve new pending patent applications and eight issued patents with the United States Patent and Trademark Office.
During the nine months ended September 30, 2021, we completed an acquisition of Pixelpin Ltd (completed on March 18, 2021), in exchange for $91 thousand in cash. Pixelpin Ltd is an image-based “Pin-on-Glass” account access solution that alleviates pain-points of traditional login methods while ensuring the security of authentication. This acquisition further enhances Trust Stamp’s innovative portfolio of technology solutions that enable improved customer experiences and reputation while broadening the scope of internal risk-management strategies and providing additional options for multi-factor authentication.
Financing Activities
For the nine months ended September 30, 2022, net cash provided by financing activities was $5.08 million, compared to net cash of $4.53 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, cash received included the $3.38 million from a warrant exercise received in December 2021 from SCV and REach® Ventures, $78 thousand from the exercise of options, $1.42 million from the sale of Class A Common Stock and warrants exercisable into Class A Common Stock in a private investment in public equity agreement with Armistice Capital Master Fund Ltd. (“Armistice PIPE”), $254 thousand in units sold and warrants exercised in connection to the Company’s 2021 raises under Regulation CF, Regulation D, and Regulation S in preparation for our Nasdaq listing, an offset of $60 thousand for principal payments made for the financial liability, and.
During the nine months ended September 30, 2021, cash received primarily related to our private fundraise under SEC Regulations D and Regulation S, from which the Company closed $3.97 million in net proceeds. Additionally, the Company received $858 thousand in proceeds from a soft loan, a potentially repayable loan, from the government of Malta. On April 22, 2021, the Company paid off its remaining hard loan balance on the books which was a venture loan with Second Century Ventures, LLC for $379,053 including interest.
Contractual Obligations and Commitments
The following table summarizes our non-cancellable contractual obligations as of September 30, 2022:
Payments Due by Period | | | | | | | | | | | | |
|
| | |
| Less Than |
| | |
| | | |
| | Total |
| 1 Year | | 1-3 Years | | 3-5 Years | ||||
Operating lease obligations | | $ | 539,119 | | $ | 111,290 | | $ | 425,404 | | $ | 2,425 |
Financial liability obligations | |
| 237,340 | |
| 29,715 | |
| 207,625 | |
| — |
| | | | | | | | | | | | |
Total contractual obligations | | $ | 776,459 | | $ | 141,005 | | $ | 633,029 | | $ | 2,425 |
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
45
The critical accounting policies and estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Capitalized Internal-Use Software, Net
Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development are capitalized. The Company capitalizes eligible costs to develop internal-use software that are incurred subsequent to the preliminary project stage through the development stage. These costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Costs incurred during the preliminary project stage and during the post-implementation operational stage are expensed as incurred. Maintenance costs are expensed as incurred. The estimated useful life of costs capitalized is evaluated for each specific project. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore changes in amortization expense in future periods.
Revenue Recognition
The Company derives its revenue primarily from professional services. Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, the Company includes an estimate of the amount it expects to receive or the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.
The Company determines the amount of revenue to be recognized through the application of the following steps:
| ● | Identification of the contract, or contracts with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when or as the Company satisfies the performance obligations. |
At contract inception, the Company will assess the services agreed upon within each contract and assess whether each service is distinct and determine those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. In general, each contract with a customer consists of a single performance obligation to perform services in which revenue is recognized when the service has been delivered.
During the year ended December 31, 2021, the Company entered into a significant contract with ICE that contained multiple performance obligations, including software application development, mobile hardware, and services to assist ICE. The Company allocates the transaction price for this contract based on the stand-alone selling price of each performance obligation. The Company uses the expected cost-plus margin approach for determining the stand-alone selling prices of the mobile hardware and services to assist ICE, as this is believed to be the most accurate method of allocating the transaction price to these performance obligations, maximizing the use of observable inputs. As the Company does not have a similar software application that has been sold to another customer, the Company uses the residual approach for determining the stand-alone selling price of the software application development by subtracting the sum of the stand-alone selling prices for the mobile hardware and services to assist ICE from the total transaction price.
Executed on April 5, 2022, and made effective March 27, 2022, Trust Stamp agreed to a modification of this contract with ICE, increasing the total contract award value to $7,176,364 from the original $3,920,764 and extending the delivery period until September 26, 2022 (subject to a right of early termination by ICE). However, due to a recent change in legislation (enacted through H.R. 2471: Consolidated Appropriations Act, 2022) which requires a Congressional notification in order for ICE to award a contract or subcontract to a particular entity for any pilot or demonstration program that uses more than 5 full-time equivalents or costs in excess of $1,000,000, effective April 15, 2022, the Company entered into an amendment with ICE to amend the terms of the ICE Contract, implementing an up to 90-day cessation of performance of the Company’s and ICE’s obligations (the “Amendment”). This change in legislation was retroactively applied to the March 27, 2022, modification to the ICE Contract. The up to 90-day cessation of the ICE Contract provided by the Amendment was intended to allow ICE ample time to obtain a Congressional notification for the modification of the ICE Contract,
46
so that the Company could continue to provide services to ICE under the ICE Contract. During the cessation period, Trust Stamp continued to incur maintenance costs specific to the April 5, 2022 modification contract, without recognizing or receiving the revenue, in order that we could be positioned to restart immediately if and when the cessation is lifted.
On July 15, 2022, the Company entered into a second amendment agreement with ICE to amend the terms of the ICE Contract. The second amendment had the effect of implementing an additional up to 60-day cessation of performance of the Company’s and ICE’s obligations under the ICE Contract previously agreed to be performed between March 27, 2022 and September 26, 2022. The second amendment was required to provide ICE additional time to complete the Congressional notification process, so that the Company could continue to provide services to ICE under the ICE Contract. During the cessation period, Trust Stamp continued to incur maintenance costs specific to the April 5, 2022 modification contract, without recognizing or receiving the revenue, in order that we could be positioned to restart immediately if and when the cessation was lifted.
On August 17, 2022, Trust Stamp received notification from ICE that it was terminating the ICE Contract for convenience effective immediately. ICE has paid Trust Stamp for the ICE Contract services performed prior to the amendment effective April 15, 2022. Additionally, Trust Stamp has received written notice that ICE will pay $720 thousand in cancellation expenses incurred during the period between April 15, 2022 and August 17, 2022 for mobile service expense, storage expense, and payroll expense. Trust Stamp recorded the expense reimbursement as revenue during the three months ended September 30, 2022.
On September 15, 2022, the Company entered into a Master Services Agreement (“the MSA”) with Innovative Government Solutions ("IGS") under which the Company and IGS will jointly offer services and IGS is granted a 12-year (renewable) license (“the license”) to resell the Company’s technology subject to payment by IGS of agreed revenue advances and end user license fees. On execution of the MSA, IGS agrees to pay $1,500,000 to the Company as a non-refundable revenue advance, an additional $1,500,000 non-refundable revenue advance on the first anniversary of the MSA, and $1,000,000 on each of the next two anniversaries of the MSA as additional non-refundable revenue advances. IGS has the right to terminate the MSA for convenience before the additional non-refundable revenue advances become due in which case the unpaid additional non-refundable revenue advances will not be payable and the license will terminate. During the nine months ended September 30, 2022, Trust Stamp received the initial $1.5 million payment, recorded the non-refundable revenue advance to deferred revenue, and recognized no IGS revenue.
Contract Balances
The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in liabilities consisting of either deferred revenue (a “contract liability”) or customer deposit liabilities. Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. Such amounts are recognized by the Company over the life of the contract upon meeting the revenue recognition criteria, but generally within one year. Customer deposit liabilities consist of billings or payments received in advance of the start of the contractual term or for anticipated revenue generating activities for the portion of a contract term that is subject to cancellation for convenience. Certain of the Company’s arrangements generally include terms that allow the customer to terminate the contract for convenience and receive a refund of the amount of the customer deposit for the percentage of the work not performed prior to the notice of termination. In these arrangements, the Company concluded there are no enforceable rights and obligations after such notice period and therefore the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposit liabilities.
The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component, as the Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.
Costs to Obtain and Fulfill Contracts
Incremental costs of obtaining a contract include only those costs that are directly related to the acquisition of contracts, including sales commissions, and that would not have been incurred if the contract had not been obtained. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it is expected that the economic benefit and amortization period will be
47
longer than one year. Costs to obtain contracts were not material in the periods presented. The Company recognizes an asset for the costs to fulfill a contract with a customer if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. Costs to fulfill contracts were not material in the periods presented. The Company elected to apply the practical expedient in accordance with ASC 340, which allows the Company to expense commissions as incurred when the contract term is twelve months or less in total.
Warrants
The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”), depending on the specific terms of the warrant agreement.
Stock- Based Compensation
The Company accounts for its stock-based compensation arrangements at fair value. Fair value of each option grant is estimated on the date of grant using either the Black-Scholes-Merton Model for stock options granted or using the fair value of a common stock for grants and restricted stock units. The calculated fair value is recognized as an expense over the requisite service period, net of estimated forfeitures, using the straight-line method.
Income Taxes
The Company records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. The deferred assets and liabilities are measured using the statutorily enacted tax rates anticipated to be in effect when those tax assets and liabilities are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for a valuation allowance.
The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not, that the position will be sustainable upon examination by the taxing authority, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. The Company makes adjustments to these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and operating results.
Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, refer to Note 1, Description of Business and Summary of Significant Accounting Policies in our condensed consolidated financial statements included elsewhere under Item 1 in this report.
As a Nasdaq listed public reporting company, we are required to publicly report on an ongoing basis as an “emerging growth company” (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company”, we may take advantage of certain exemptions from
48
various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies”, including but not limited to:
| ● | not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; |
| ● | taking advantage of extensions of time to comply with certain new or revised financial accounting standards; |
| ● | being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and |
| ● | being exempt from the requirement to hold a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. |
We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We may remain an “emerging growth company” for up to five years, beginning January 26, 2022, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30th before that time, we would cease to be an “emerging growth company” as of the following December 31st.
In summary, we are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies” and therefore, our shareholders could receive less information than they might expect to receive from more mature public companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, and thus, this section is not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving their desired control objectives.
Based on the evaluation Company’s disclosure controls and procedures as of the end of the period covered by this report, its Chief Executive Officer and Chief Financial Officer concluded that, as of such date, its disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
In connection with the audit of our financial statements for the year ended December 31, 2021, our independent auditor identified material weaknesses in our internal control over financial reporting. The material weaknesses related to certain corporate finance and accounting oversight functions reside over the detection of errors that were present within the Company’s calculation of stock-based awards as well as the financial reporting close process.
During the nine months ended September 30, 2022, covered by this report, there have been no changes in Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
49
Notwithstanding this material weakness, management has concluded that our financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with GAAP.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on our business, financial position, or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened.
Item 1A. Risk Factors.
Not applicable.
50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the nine months ended September 30, 2022, the Company sold the following securities in transactions not registered under the Securities Act:
51
| | |
| |
| Number of |
|
|
|
| |
|
|
| Date Closed |
Offering | | | | Date | | shares | | Class of | | Proceeds | | Use of | | (if Open, | |
Type |
| Intermediary |
| Commenced |
| issued |
| Securities |
| Raised |
| Proceeds |
| N/A) | |
2021 Reg CF |
| Dalmore Group LLC |
| 8/25/2021 |
| 1,137,975 |
| Units comprised of Class A Common Stock and Warrants to acquire Class A Common Stock | | $ | 4.6 million |
| Product development, marketing, and working capital |
| 2/18/2022 |
2021 Reg D |
| n/a |
| 8/25/2021 |
| 240,989 |
| Units comprised of Class A Common Stock and Warrants to acquire Class A Common Stock | | $ | 1.0 million |
| Product development, marketing, and working capital |
| 2/1/2022 |
2021 Reg S |
| n/a |
| 8/25/2021 |
| 56,104 |
| Units comprised of Class A Common Stock and Warrants to acquire Class A Common Stock | | $ | 0.2 million |
| Product development, marketing, and working capital |
| 1/7/2022 |
2022 Reg A | | n/a | | 01/26/2022 | | 14,250 | | Shares of Class A Common Stock issuable upon exercise of Reg CF, Reg D, and Reg S Warrants | | $ | 57,000 | | Product development, marketing, and working capital | | N/A |
52
2022 Reg D | | Maxim Group LLC | | 09/14/2022 | | 1,975,000 | | Class A Common Stock Warrants to purchase Class A Common Stock | | $ | 1.51 million | | Working Capital | | 9/14/2022 |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
53
Item 6. Exhibits.
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
3.1 |
| |
| | |
3.2 | | |
| | |
3.3 | | |
| | |
3.4 | | |
| | |
10.7 | | |
| | |
10.9 | | |
| | |
10.11 | | |
| | |
10.12 | | |
| | |
10.13 | | |
| | |
10.14 | | |
| | |
10.15 | | |
| | |
10.16 | | |
| | |
10.18 | | |
| | |
10.19 | | |
| | |
10.20 | |
54
| | |
10.21 | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema |
| | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase |
| | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase |
| | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase |
| | |
104 | | Cover Page Interactive Data File—the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
* Filed herewith.
55
SIGNATURES
Pursuant to the requirements of the securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
T STAMP INC. | |
| |
| |
/s/ Gareth Genner | |
Gareth Genner, Chief Executive Officer | |
Trust Stamp | |
| |
The following persons in the capacities and on the dates indicated have signed this report. | |
/s/ Gareth Genner | |
Gareth Genner, Principal Executive Officer, Chief Executive Officer, Director | |
Date: November 10, 2022 | |
| |
| |
/s/ Alex Valdes | |
Alex Valdes, Principal Financial Officer, Principal Accounting Officer | |
Date: November 10, 2022 | |
/s/ Andrew Gowasack | |
Andrew Gowasack, President, Director | |
Date: November 10, 2022 | |
/s/ David Story | |
David Story, Director | |
Date: November 10, 2022 | |
/s/ William McClintock | |
William McClintock, Director | |
Date: November 10, 2022 | |
/s/ Mark Birschbach | |
Mark Birschbach, Director | |
Date: November 10, 2022 | |
/s/ Joshua Allen | |
Joshua Allen, Director | |
Date: November 10, 2022 | |
/s/ Kristin Stafford | |
Kristin Stafford, Director | |
Date: November 10, 2022 | |
/s/ Berta Pappenheim | |
Berta Pappenheim, Director | |
Date: November 10, 2022 | |
56
Exhibit 31.1
CERTIFICATIONS
I, Gareth Genner, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 of T Stamp Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 10, 2022
/s/ Gareth Genner |
|
Gareth Genner |
|
Chief Executive Officer (Principal Executive Officer) |
|
Exhibit 31.2
CERTIFICATIONS
I, Alex Valdes, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 of T Stamp Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 10, 2022
/s/ Alex Valdes |
|
Alex Valdes |
|
Chief Financial Officer |
|
(Principal Financial Officer) |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of T Stamp Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022 as filed with the Securities and Exchange Commission (the “Report”), I, Gareth Genner, Chief Executive Officer of the Company, and I, Alex Valdes, Chief Financial Officer of the Company, certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: November 10, 2022
/s/ Gareth Genner |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
|
/s/ Alex Valdes |
|
Chief Financial Officer |
|
(Principal Financial Officer) |
|