T Stamp Inc 10-K/A, filed Dec 22, 2022
T Stamp Inc (IDAI)
About this 10-K/A
T Stamp Inc filed this 10-K/A on December 22, 2022, covering the fiscal year ended December 31, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Amendment No. 1)
For the fiscal year ended
For the transition period from __________ to __________
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| 7372 | ||||
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Documents Incorporated by Reference
None
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Table of Contents
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EXPLANATORY NOTE
T Stamp Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Original Filing” and, together with this Amendment, the “Form 10-K Filings”), which was filed with the Securities and Exchange Commission (the “SEC”) on April 7, 2022 (the “Original Filing Date”), to amend and restate Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, with respect to certain non-GAAP financial disclosures, and Part II, Item 9A, “Controls and Procedures,” with respect to the conclusion of management regarding the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2021. Specifically, this Amendment removes non-GAAP financial disclosures of gross revenue which were determined to be individually tailored financial measurements, and amends management’s determination regarding its disclosure controls and procedures with the presence of material weaknesses in its internal controls over financial reporting, respectively.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is also including in this Amendment an amended and restated Part IV, Item 15 to include currently dated certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (“SOX”) from the Company’s principal executive officer and principal financial officer. Because no financial statements have been included in this Amendment, paragraph 3 of the certifications has been omitted. Similarly, the Company is not including certifications under Section 906 of SOX, as no financial statements are being filed with this Amendment.
This Amendment speaks as of the Original Filing Date of the Original Filing (unless otherwise noted or as the context otherwise requires) and reflects only the changes to the cover page, Item 7 of Part II, Item 9A of Part II, and the Exhibit Index in Item 15 of Part IV. No other information included in the Original Filing has been modified or updated in any way. The Original Filing continues to speak as of the Original Filing Date, and the Company has not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the Original Filing Date other than as expressly indicated in this Amendment. Accordingly, this Amendment should be read in conjunction with the Original Filing and the Company’s other SEC filings.
In this Amendment, T Stamp Inc. (together with its subsidiaries) is referred to as the “Company,” “Trust Stamp,” “we,” “us,” or “our.”
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PART II
Item 7. 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 consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. 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. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. 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 (collectively (unless context indicates otherwise) “Trust Stamp”, “We”, or the “Company”) develops and markets identity authentication software solutions for government and enterprise partners and peer-to-peer markets.
Trust Stamp develops proprietary artificial intelligence powered solutions; researching and leveraging cutting edge technology including biometric science, cryptography, and data mining to deliver insightful identity and trust predictions while protecting the user’s privacy and identifying and defending against fraudulent identity attacks. We utilize the cutting-edge power and agility of technologies such as GPU processing, neural networks and edge computing to process data faster and more effectively than has ever previously been possible as well as delivering results at a disruptively low cost for usage across multiple industries, including
| · | Banking/FinTech |
| · | Humanitarian and Development Services |
| · | Biometrically Secured Email |
| · | KYC/AML Compliance |
| · | Government and Law Enforcement |
| · | P2P Transactions, Social Media, and Sharing Economy |
| · | Real Estate, Travel and Healthcare |
During the year ended December 31, 2021, Trust Stamp continued the diversification of our customer network while maintaining service agreements for our three largest clients, U.S. Immigration and Customs Enforcement (“ICE”), a SP500 bank, and Mastercard, which made up 91% of total revenue during the year ended December 31, 2021 compared to 64% of total revenue during the year ended December 31, 2020. Simultaneously, we increased focus on expanding our marketing efforts in the U.S., U.K., E.U., and Africa to recruit new clients including new vertical engagements with the travel and insurance industries. Our most recent investments include the openings of new offices and the addition of staff in the British Isles, Rwanda, and Malta.
On February 23, 2021, we completed the acquisition of Pixelpin in exchange for $91 thousand of cash. Pixelpin 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.
Our investment in business development generated a growing component of Trust Stamp’s revenue during the year ended December 31, 2021 and has led to a number of engagements with significant clients for proof-of-concept deliveries and new product sales, laying a solid foundation to grow future revenue including annual recurring revenue from access and usage fees.
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Our Customers and Business
Trust Stamp increased the concentration of non-affiliated clients generating significant revenue from 3 customers in the year ended December 31, 2020 to 6 customers in the year ended December 31, 2021, with further client-revenue growth achieved and anticipated in 2022.
It was publicly announced in September 2021 that Mastercard’s Community Pass is being implemented for a project between Mastercard and Paycode, with a goal of servicing 30 million customers that are underserved and unbanked in Africa. Given that Trust Stamp’s IT2 and Facial Recognition technologies are utilized within the Mastercard Community Pass platform on a pay-per-use basis, it is anticipated that the implementation will generate substantial pay-per-use revenue over and above guaranteed minimum revenue under the software agreement.
In 2021, we pursued the award of a significant contract with the ICE which required an investment in productization, business development and satisfying extensive due diligence processes. The $3,920,764 contract was awarded September 23, 2021 for commencement of services on September 27, 2021. The Company is performing its obligations under this contract as of the date of this report and during the year ended December 31, 2021 recognized $1.7 million in net sales related to this agreement. Alongside the revenue implications of this specific contract, it is believed that a successful execution will lead to extended and additional contracts of the same nature in addition to increasing Trust Stamp’s corporate visibility, reputation, and trust in associated markets.
Trust Stamp continues to expand a robust sales pipeline in the Company’s key markets and the velocity of pipeline growth has increased in 2021. Our pipeline included 55 potential revenue contracts and projects as of December 31, 2021.
During the year ended December 31, 2021, the Company contracted with a third-party software developer to meet the need for additional research and development resources over and above internal resources.
During the year ended December 31, 2021, the cost of those services was the largest single expense other than internal employment costs. We have continued scaling our development team in Malta and have established a new development team in Rwanda. The expansion of our internal development teams has required additional hiring, onboarding, training and equipment costs in 2021 but will going forward allow us to substantially increase the percentage of contracts that are serviced internally with an estimated 60% reduction in our per-hour development costs versus contracted services.
Trust Stamp’s key sub-markets are identity authentication for the purpose of account opening, access and fraud detection and the creation of tokenized identities to facilitate financial & societal inclusion.
Key Business Measure
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.
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.
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Adjusted EBITDA has limitations as an analytical tool and you should not consider it 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
| For the years ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net loss before taxes | $ | (9,058,906 | ) | $ | (10,683,624 | ) | ||
| Add: Other expense | 159,533 | — | ||||||
| Less: Other income | (56,932 | ) | (81,137 | ) | ||||
| Less: Grant income | (61,601 | ) | (189,507 | ) | ||||
| Add: Interest expense (income) | 39,970 | 182,794 | ||||||
| Add: Warrant expense | — | 1,413,273 | ||||||
| Add: Stock-based compensation | 2,780,639 | 2,517,555 | ||||||
| Add: Impairment of investment in related party | — | 962,000 | ||||||
| Add: Non-cash expenses for in-kind services | 261,794 | 93,100 | ||||||
| Add: Depreciation and amortization | 573,755 | 406,241 | ||||||
| Adjusted EBITDA loss (non-GAAP) | $ | (5,361,748 | ) | $ | (5,379,305 | ) | ||
Adjusted EBITDA (non-GAAP) loss for the year ended December 31, 2021, decreased by 0.33%, to $5.36 million from $5.38 million for the year ended December 31, 2020. The overall increase/decrease in adjusted EBITDA loss was driven primarily by a $1.40 million increase in gross margin during the year ended December 31, 2021, offset by an increase in selling, general and administrative expenses of $1.94 million during the year ended December 31, 2021. 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 year ended December 31, 2021.
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Financial Highlights (non-GAAP) Three-Months and Year Ended December 31, 2021
Key Business Measures
| For the three-months ended | For the year ended | |||||||||||||||
| December 31, 2021 | December 31, 2021 | |||||||||||||||
| Amount | Margin | Amount | Margin | |||||||||||||
| Net sales | $ | 2,096,100 | 100.00 | % | $ | 3,677,896 | 100.00 | % | ||||||||
| Growth compared to prior year period | 69.71 | % | 38.88 | % | ||||||||||||
| Loss from operations | $ | (1,966,840 | ) | (93.83 | )% | $ | (8,890,992 | ) | (241.74 | )% | ||||||
| Adjusted loss from operations (non-GAAP) | (580,179 | ) | (27.68 | )% | (5,274,804 | ) | (143.42 | )% | ||||||||
| Adjusted free cash flow (non-GAAP) | (1,580,424 | ) | (75.40 | )% | (7,482,827 | ) | (203.45 | )% | ||||||||
| Net loss | (2,023,781 | ) | (96.55 | )% | (9,058,906 | ) | (246.31 | )% | ||||||||
| Adjusted EBITDA (non-GAAP) | (612,751 | ) | (29.23 | )% | (5,361,748 | ) | (145.78 | )% | ||||||||
| Adjusted EBITDA per share, diluted (non-GAAP) | (0.03 | ) | (0.28 | ) | ||||||||||||
| GAAP net loss per share, diluted | (0.10 | ) | (0.48 | ) | ||||||||||||
Net sales for the three months ended December 31, 2021 made up 56.99% of total net sales recognized for the year ended December 31, 2021. This uptick in the fourth quarter is primarily attributable to $1.68 million of recognized revenue from the new $3.92 million ICE contract entered into in September 2021 with an initial term of 6 months. Further, during the fourth quarter ended December 31, 2021, the percentage of revenue associated with our other Key Business Measures (loss from operations, adjusted free cash flow, net loss, adjusted EBITDA, adjusted EBITDA per share, diluted, and net loss per share, diluted) has significantly decreased when compared to the year ended December 31, 2021. The sharp improvement in these margins is primarily attributable to the cost margins associated with the ICE contract being much lower than those associated with the majority of our other revenue agreements. This is indicative of the Company’s transition to lower cost margin contracts which involve semi-customized solutions versus semi-customized solutions which are implemented using semi-customized existing internal-use software.
Adjusted Loss from Operations and Adjusted Operating Margin
| For the three-months ended | For the year ended | |||||||
| December 31, 2021 | December 31, 2021 | |||||||
| Loss from operations | $ | (1,966,840 | ) | $ | (8,890,992 | ) | ||
| Add: Depreciation and amortization | 151,028 | 573,755 | ||||||
| Add: Non-cash expenses for in-kind services | 177,930 | 261,794 | ||||||
| Add: Stock-based compensation | 1,057,703 | 2,780,639 | ||||||
| Adjusted loss from operations | $ | (580,179 | ) | $ | (5,274,804 | ) | ||
| Adjusted operating margin | (27.68 | )% | (143.42 | )% | ||||
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Adjusted Free Cash Flow
| For the three-months ended | For the year ended | |||||||
| December 31, 2021 | December 31, 2021 | |||||||
| Net cash provided by operating activities | $ | (1,444,016 | ) | $ | (6,714,474 | ) | ||
| Less: purchases of property, plant and equipment | (316 | ) | (34,217 | ) | ||||
| Less: acquisition of intangible assets | — | (90,621 | ) | |||||
| Less: internally developed software | (113,576 | ) | (482,219 | ) | ||||
| Less: acquisition of patents | (22,516 | ) | (161,296 | ) | ||||
| Adjusted free cash flow | $ | (1,580,424 | ) | $ | (7,482,827 | ) | ||
| Adjusted free cash flow margin | (75.40 | )% | (203.45 | )% | ||||
Adjusted free cash flow margin improved from 203.45% for the year ended December 31, 2021 to 75.40% for the quarter ended December 31, 2021. This improvement is primarily attributable to the margin generated on the new ICE revenue contract, which had services commence during the fourth quarter of 2021. The recognized margin associated with this contract during the fourth quarter was $1.59 million, or 95%, which is significantly higher than our gross margin during the year ended December 31, 2021 of $2.53 million, or 69%.
Adjusted EBITDA
| For the three-months ended | For the year ended | |||||||
| December 31, 2021 | December 31, 2021 | |||||||
| Net loss before taxes | $ | (2,023,781 | ) | $ | (9,058,906 | ) | ||
| Add: Other expense | 74,316 | 159,533 | ||||||
| Less: Other income | (46,067 | ) | (56,932 | ) | ||||
| Less: Grant income | — | (61,601 | ) | |||||
| Add: Interest expense (income) | (3,880 | ) | 39,970 | |||||
| Add: Non-cash expenses for in-kind services | 177,930 | 261,794 | ||||||
| Add: Depreciation and amortization | 151,028 | 573,755 | ||||||
| Add: Stock-based compensation | 1,057,703 | 2,780,639 | ||||||
| Adjusted EBITDA | $ | (612,751 | ) | $ | (5,361,748 | ) | ||
| Adjusted EBITDA margin | (29.23 | )% | (145.78 | )% | ||||
Adjusted EBITDA margin improved from 145.78% for the year ended December 31, 2021 to 29.23% for the quarter ended December 31, 2021. This margin improvement is primarily attributable to margin generated on the new ICE revenue contract, which had services commenced during the fourth quarter of 2021.
Adjusted EBITDA per Share, Diluted
| For the three-months ended | For the year ended | |||||||
| December 31, 2021 | December 31, 2021 | |||||||
| Adjusted EBITDA | $ | (612,751 | ) | $ | (5,361,748 | ) | ||
| Weighted average shares of common stock outstanding | 19,783,165 | 18,837,358 | ||||||
| Adjusted EBITDA per share, diluted | $ | (0.03 | ) | $ | (0.28 | ) | ||
Components of Results of Operations
Net sales
We derive our revenue primarily from professional services. Most of the revenue is derived from the contract with ICE which amounts to $1.7 million for the year ended December 31, 2021.
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Cost of services provided
Cost of services provided generally consists of the cost of hosting fees and cost of labor associated with professional services rendered. Depreciation and amortization expense is not included in cost of services provided.
Further, several projects that were originally in the research and development stage became feasible projects, shifting the allocation of cost from research and development into cost of services provided in the current year as client specific products were implemented using the technologies. This increase of expense allocation is a result of our prior decision to invest more money in research and development in prior periods and our goal of accelerating our product roadmap coming to fruition.
We expect that cost of services provided will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue.
Research and development
Research and development expenses (“R&D”) consist primarily of personnel costs, including salaries and benefits. Personnel costs are allocated to R&D for time spent working on the preliminary project stage and post-implementation maintenance as well as time spent on bug fixes associated with internal-use software activities, front-end application development in which technological feasibility has not been established, and services rendered to customers under funded software-development arrangements.
We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities.
Selling, general, and administrative
Selling, general, and administrative (“SG&A”) expenses were generally composed of payroll, legal, and professional fees, including an increase in sales commission expense incurred because of new statements of work.
We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers, in growing our business and enhancing our brand awareness.
Depreciation and amortization
The increase in depreciation and amortization is primarily due to a continued investment in internally developed software which will be used for future productization.
Interest income (expense)
Interest income (expense) consists primarily of interest expense accrued on a promissory notes payable. Additionally, the Company earned interest income in the form of cash back by using its corporate line of credit.
Warrant expense
The warrant expense relates to the warrants issued during the periods presented. For more information on warrants, see Issuances of Equity, Notes, Warrants and SAFEs section below in the document.
Impairment of investment in related party
The impairment of investment in related party relates to Emergent wherein we were informed in April 2021 that Emergent wound up and ceased operations in December 2020 therefore, the investment was written off as a non-operating expense. We note that all purchase orders related to Emergent were fully delivered prior to it winding up and no further obligation to them exists.
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Grant income
The Company had grant income primarily related to Trust Stamp Malta’s agreements with Republic of Malta. During July 2020, the Company entered into an agreement 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. The Company was required to provide an initial capital amount of €50 thousand euros, which is matched with a €50 thousand grant.
Other income
Other income is mainly driven by miscellaneous income earned that is unrelated to the main focus of the Company’s business.
Other expense
Other expense is mainly driven by the fact that the Company operates in multiple countries, including the U.K., Malta, and Rwanda, and as such, has certain exchange rate gains and losses associated with converting the foreign currency activity to the Company’s reporting currency, USD.
Results of Operations
The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenue for the years ended December 31, 2021 and 2020:
| For the years ended December 31 | ||||||||
| 2021 | 2020 | |||||||
| Net sales (1) | $ | 3,677,896 | $ | 2,648,322 | ||||
| Operating Expenses: | ||||||||
| Cost of services provided (exclusive of depreciation and amortization shown separately below) | 1,151,057 | 1,520,297 | ||||||
| Research and development | 2,529,501 | 2,742,349 | ||||||
| Selling, general, and administrative | 8,314,575 | 6,375,637 | ||||||
| Depreciation and amortization | 573,755 | 406,240 | ||||||
| Total Operating Expenses | 12,568,888 | 11,044,523 | ||||||
| Operating Loss | (8,890,992 | ) | (8,396,201 | ) | ||||
| Non-Operating Income (Expense): | ||||||||
| Interest income (expense) | (39,970 | ) | (182,794 | ) | ||||
| Change in fair value of warrant liability | (86,944 | ) | — | |||||
| Warrant expense | — | (1,413,273 | ) | |||||
| Impairment of investment in related party | — | (962,000 | ) | |||||
| Grant income | 61,601 | 189,507 | ||||||
| Other income | 56,932 | 81,137 | ||||||
| Other expense | (159,533 | ) | — | |||||
| Total Other Expense, Net | (167,914 | ) | (2,287,423 | ) | ||||
| Net Loss before Taxes | (9,058,906 | ) | (10,683,624 | ) | ||||
| Income tax expense | — | — | ||||||
| Net loss including noncontrolling interest | (9,058,906 | ) | (10,683,624 | ) | ||||
| Net loss attributable to noncontrolling interest | (1,743 | ) | (63 | ) | ||||
| Net loss attributable to T Stamp Inc. | $ | (9,057,163 | ) | $ | (10,683,561 | ) | ||
| Basic and diluted net loss per share attributable to T Stamp Inc. | $ | (0.48 | ) | $ | (0.90 | ) | ||
| Weighted-average shares used to compute basic and diluted net loss per share | 18,837,358 | 11,817,775 | ||||||
| (1) | Includes related party sales of $0 and $905 thousand for the years ended December 31, 2021 and 2020, respectively. |
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Comparison of the Years Ended December 31, 2021 and 2020
The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:
| For the years ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net sales | 100 | % | 100 | % | ||||
| Operating Expenses: | ||||||||
| Cost of services provided (exclusive of depreciation and amortization shown separately below) | 31 | 57 | ||||||
| Research and development | 69 | 104 | ||||||
| Selling, general, and administrative | 226 | 241 | ||||||
| Depreciation and amortization | 16 | 15 | ||||||
| Total Operating Expenses | 342 | 417 | ||||||
| Operating Loss | (242 | ) | (317 | ) | ||||
| Non-Operating Income (Expense): | ||||||||
| Interest income (expense) | (1 | ) | (7 | ) | ||||
| Change in fair value of warrant liability | (2 | ) | — | |||||
| Warrant expense | — | (53 | ) | |||||
| Impairment of investment in related party | — | (36 | ) | |||||
| Grant income | 2 | 7 | ||||||
| Other income | 2 | 3 | ||||||
| Other expense | (4 | ) | — | |||||
| Total Other Expense, Net | (5 | ) | (86 | ) | ||||
| Net Loss before Taxes | (246 | ) | (403 | ) | ||||
| Income tax expense | — | — | ||||||
| Net Loss | (246 | )% | (403 | )% | ||||
Net sales
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Net sales | $ | 3,677,896 | $ | 2,648,322 | $ | 1,029,574 | 38.9 | % | ||||||||
Net sales increased by $1.03 million, or 38.9%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was driven by revenue contracts executed by newly acquired and existing customers. Total net sales from new revenue contracts signed in 2021 produced $2.51 million, consisting of $1.68 million from ICE, $211 thousand from an SP500 bank, a statement of work (“SOW”) from Mastercard for $334 thousand, $224 thousand from FIS, and the remaining $61 thousand from various other new SOW.
Additionally, the Company saw large increases in revenue from SOW that existed in 2020, specifically a 400% increase from an SOW with an SP500 bank, and SOW 6 and 10 with Mastercard that increased by 33.33% and 50.00%, respectively. Finally, and most notably, during the third quarter 2021, the Company executed a 6-month, $3.92 million revenue contract with ICE, which launched in the fourth quarter of 2021 and provides six monthly payments of $653 thousand until its completion on March 27, 2022.
Cost of services provided
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Cost of services provided | $ | 1,151,057 | $ | 1,520,297 | $ | (369,240 | ) | (24.3 | )% | |||||||
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Cost of services provided (“COS”) decreased by $369 thousand, or 24.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This decrease was primarily driven by the completion of a contract with Emergent Technology Holdings (“Emergent”) in the year ended December 31, 2020, which accounted for $781 thousand or 51.35% of COS for the year ended December 31, 2020. The reduction of year-over-year (“YOY”) COS, due to the completion of the Emergent contract, was offset in 2021 by a 55.6% increase in COS related to new and existing customer implementations.
During the year ended December 31, 2021, gross profit increased by 124.0% or $1.40 million from $1.13 million for the year ended December 31, 2020 to $2.53 million for the year ended December 31, 2021. Gross margins improved by 26.1% from 42.6% for the year ended December 31, 2020 to 68.7% for the year ended December 31, 2021.
This considerable improvement in gross profit and margin is a result of the Company’s revenue mix transition. Historically, revenue contracts consisted mostly of services-based SOW to build fully customized solutions, which as a result, funded the development of the Company’s internal-use software or microservices. These microservices can be arranged in various ways to deliver semi-customizable solutions for many customers over time. As the Company transitions its revenue mix from fully-custom to semi-custom solutions, using its existing technology, margins improve dramatically as there is a relatively nominal cost to implementing existing technology, which is currently evident in the gross profit margin of the ICE revenue contract. Additionally, during the year ended December 31, 2021, the ICE revenue contract enjoyed even higher margins than expected due to certain performance obligations that were not fulfilled as of December 31, 2021. The Company anticipates it will incur higher costs in fiscal year 2022 related to other performance obligations under the ICE contract not yet delivered as of December 31, 2021, therefore, the ICE revenue contract is expected to experience lower margins in the first quarter of 2022.
Research and development
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Research and development | $ | 2,529,501 | $ | 2,742,349 | $ | (212,848 | ) | (7.8 | )% | |||||||
Research and development expense decreased by $213 thousand, or 7.8%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease is driven by the $1.00 million in non-cash equity compensation that was awarded to R&D team members for 2019 services and vested on December 8th, 2020 upon the Company’s public listing on Euronext Growth Exchange. This one-off award caused an unusual spike in R&D expenses for 2020. The 2021 R&D expense increases that offset the YOY variance due to the 2019 award spike were driven by the Company’s continued investment in R&D mostly by ramping up headcount during the fiscal years 2020 and 2021. In 2021, the Company’s R&D subsidiary, Trust Stamp Malta Limited, grew its headcount from 23 to 40 full-time equivalents (“FTE”). Additionally, the Company opened its African R&D center, Trust Stamp Rwanda Limited in Rwanda, staffing 11 FTE by the end of 2021. Finally, the Company added 3 new technical staff members in the US to service the ICE contract.
Selling, general, and administrative
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Selling, general, and administrative | $ | 8,314,575 | $ | 6,375,637 | $ | 1,938,938 | 30.4 | % | ||||||||
Selling, general and administrative expense increased by $1.94 million, or 30.4%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is driven mostly by the 64.9% growth in team member headcount and associated overhead for 57 to 94 FTE. Similarly, the addition of new personnel resulted in an increase of $808 thousand in non-cash, stock-based compensation which accounted for 41.7% of the increase. YOY stock-based compensation was driven, in part, by the Company’s stock price input which is used in accounting estimates to determine the non-cash expense for equity contracts. As the Company’s stock price increased from $1.56 to $4.00 YOY, the associated expense increased exponentially.
Depreciation and amortization
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Depreciation and amortization | $ | 573,755 | $ | 406,240 | $ | 167,515 | 41.2 | % | ||||||||
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Depreciation and amortization expense increased by $168 thousand, or 41.2%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily attributable to depreciation and amortization charged amounting to $67 thousand for the year ended December 31, 2021 on assets purchased in Malta to establish research and development center as compared to depreciation and amortization amounting to $9 thousand for the year ended December 31, 2020. The increase is further attributable to three new patent issuances during the year ended December 31, 2021 which resulted in $34 thousand in additional amortization.
Interest income (expense)
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Interest income (expense) | $ | (39,970 | ) | $ | (182,794 | ) | $ | 142,824 | (78.1 | )% | ||||||
Interest expense decreased by $143 thousand, or 78.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily attributable to conversion of the SixThirty Cyberfund note in June 2020 which produced a one time beneficial conversion expense of $100 thousand. Additionally, Company paid off its promissory note entered with Second Century Ventures (“SCV”) in April 2021.
Change in fair value of warrant liability
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Change in fair value of warrant liability | $ | (86,944 | ) | $ | — | $ | (86,944 | ) | — | |||||||
The Company recognized a change in fair value of warrant liability for the year ended December 31, 2021 of $87 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 8 of this report.
Warrant expense
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Warrant expense | $ | — | $ | 1,413,273 | $ | (1,413,273 | ) | — | % | |||||||
Warrant expense for the year ended December 31, 2021 is due to sale of warrants to SCV which resulted in a one time non-cash warrant expense of $1.41 million as described below in the “Liquidity and Capital Resources” section of this report.
Impairment of investment in related party
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Impairment of investment in related party | $ | — | $ | (962,000 | ) | $ | 962,000 | — | % | |||||||
Impairment of investment in related party during the year ended December 31, 2020 relates to impairment of investment in Emergent Technology Holdings LLP made by the Company in July 2019 by purchasing 9.62 Class A units from shareholder of the Company in exchange for 2,235,575 shares of Class A Shares of Common Stock in the Company. See Note 16, “Investment in Related Party”, to the financial statements included under Item 8 of this report.
Grant income
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Grant income | $ | 61,601 | $ | 189,507 | $ | (127,906 | ) | (67.5 | )% | |||||||
Grant income decreased by $128 thousand, or 67.5%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Grant income for both 2020 and 2021 relate to the Business Development and Continuity Scheme grant with the Malta Enterprise for €200 thousand. The grant proceeds were received over a 2 year period and converted from EUR to USD for a total of $251 thousand, of which $189 thousand was received in the year ended December 31, 2020 and the balance of $62 thousand was received in the year ended December 31, 2021.
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Other income
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Other income | $ | 56,932 | $ | 81,137 | $ | (24,205 | ) | (29.8 | )% | |||||||
Other income decreased by $24 thousand, or 29.8%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, which is primarily due to there being no realized foreign currency gains during the year ended December 31, 2021.
Other expense
| For the years ended December 31, | ||||||||||||||||
| 2021 | 2020 | $Change | % Change | |||||||||||||
| Other expense | $ | (159,533 | ) | $ | — | $ | (159,533 | ) | — | |||||||
Other expense increased by $160 thousand for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to realized losses related to the fluctuation in foreign currency balances and other miscellaneous non-operating expenses.
Liquidity and Capital Resources
As of December 31, 2021 and 2020, we had approximately $3.48 million and $1.47 million cash in our banking accounts, respectively, with total current assets of $5.76 million and $2.08 million, respectively. The increase in current assets is mostly due to the timing of capital expenditures and fundraising cycles. During the year ended December 31, 2021, the Company spent considerable resources to launch a round of funding that, by year-end, raised approximately $5.50 million under Regulation CF, Regulation D, and Regulation S in preparation for its Nasdaq listing. See below for more details on these offerings.
Also, we have experienced a decrease in current liabilities of 2.10%. As of December 31, 2021, our current liabilities totaled $2.40 million, as compared to $2.45 million at December 31, 2020. This difference is primarily attributable to changes in timing of deferred revenue and customer deposit liabilities coupled with the payoff of nonconvertible notes payable during the year ended December 31, 2021. In both periods, there are timing related variances in revenue recognition that resulted in more deferred revenue and customer deposit liabilities recorded as of December 31, 2021 than the deferred revenue [0]and customer deposit liabilities recorded as of December 31, 2020. Various statements of work that existed as deferred revenue and customer deposit liabilities as of December 31, 2020 subsequently were recognized during the year ended December 31, 2021. Additionally, the Company had a reduction in our current debt due to the payoff of our venture loan to SCV in April 2021 as well as a decrease in our payable accounts due to the drop in third-party developer billings. As a result of the foregoing, as of December 31, 2021, the Company had a positive working capital balance of $3.36 million, and an accumulated deficit of $27.21 million.
Effective September 3, 2019, the Company entered into a software license agreement with a customer pursuant to which the Company received total fees of $150,000 in 2020 and will receive minimum total fees of $200,000 in 2021, $250,000 in 2022, rising by 15% in each subsequent year beginning in 2023 with a cap of $1.0 million. As such, we expect this to be a steady source of revenue for the Company going forward. The Company has recognized $200 thousand of the software license agreement fees for the year ended December 31, 2021. Trust Stamp received confirmation on September 17, 2021 that this license agreement has been extended through 2022.
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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 $88 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 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 January 7, 2022, we closed the public portion of 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 September 23, 2021, the Company was awarded a $3,920,764 contract with ICE. A copy of this agreement is filed as Exhibit 10.12 to this report. Alongside the revenue implications of this specific contract, it is believed that a successful execution will lead to extended and additional contracts of the same nature with ICE.
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, 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 $1.60 per share for a total purchase price of $3.3 million.
The Company believes that revenues from its existing clients, without any new contracts (i.e. a renewal of the ICE contract described above) or proceeds from the Company’s current capital raising efforts, will provide it with adequate amounts of cash to meet the Company’s needs in the short-term (i.e., the next 12 months) and in the long-term (i.e., beyond the next 12 months).
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 12 months, with projected human resources costs totaling approximately $750,000 per month. The Company believes, as described above, cash on hand combined with 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.
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Issuances of Equity, Notes, Warrants and SAFEs
Series A Preferred Stock offering. On July 17, 2020, we closed our Series A Preferred Stock offering, which utilized Regulation A under the Securities Act of 1933 and was qualified by the Securities and Exchange Commission (“SEC”) on May 5, 2020. The offering involved sales through a combination of private placements, including through issuance of convertible notes, and investments through the SeedInvest platform. We issued through a conversion of convertible instruments or sold a total of 1,264,452 shares of Series A Preferred Stock at an offering price of $7.79 per share. Gross proceeds raised from this offering were $8.4 million in total and offering costs were $1 million resulting in net cash proceeds of $7.4 million.
As part of this offering, two buyers were also able to purchase shares of Class A Shares of Common Stock for $0.01 per share while paying a price of $7.79 per share for Series A Preferred Stock for a total purchase price of $475 thousand. As a result, the proceeds were allocated between the Series A Preferred Stock and common shares on a relative fair value basis resulting in the recognition of $366 thousand as Series A Preferred Stock and $109 thousand to Class A Common Stock. Gross and net proceeds disclosed above have been adjusted for this allocation.
In addition to the gross cash proceeds above, as part of the Series A Preferred Stock raise, the Company also reserved common shares for stock options and restricted stock awards granted to employees in 2020 with a grant date fair value of $631 thousand, we exchanged $400 thousand of common shares for a portion of the outstanding Emergent SAFE as discussed in Note 5 to the financial statements included under Item 8 of this report, and we sold warrants for Class A Shares of Common Stock for in exchange for the extinguishment of a SAFE for $125 thousand, $300 thousand in cash and $300 thousand in prepaid sponsorship value for an accelerator program which is further discussed below.
As of September 8, 2020, the Company and most of the Series A Preferred Stockholders voted to convert all Series A Preferred Stock to shares of Class A Common Stock, and it was effective on that date.
Regulation D Common Stock offering. See more information on Regulation D fundraising in Liquidity and Capital Resources disclosure above.
Convertible Notes. On December 16, 2016, we entered a convertible promissory note with an investor in which we received $100 thousand through the issuance of the convertible promissory note and a warrant to purchase $50 thousand of Class A Shares of Common Stock. The principal, together with all accrued and unpaid interest, was initially due on December 16, 2018 and was not pre- payable unless there is a change in control. An extension was granted by the investor to extend the maturity date to June 30, 2020. The convertible notes included several conversion terms, including one around qualified financing where if our next financing occurred on or before the maturity date, and we raised $2 million or more in case, the note would be converted into preferred stock. The qualified financing term was triggered for this convertible note payable when $2 million was raised prior June 30, 2020 as discussed above. Therefore, this convertible note, along with all accrued interest, totaling $118 thousand was converted to 68,203 shares of Series A Preferred Stock, considering the valuation cap, and is no longer reflected as outstanding as of December 31, 2020.
On December 3, 2019, we entered a convertible promissory note with a customer in which they received $700 thousand. All unpaid principal and accrued interest were due on December 31, 2020 (i.e. the maturity date). However, in the event that the note was not converted into equity securities of the Company, the maturity date would be extended to December 31, 2025. The convertible note included several conversion terms, including one around qualified financing where if we issued and sold shares of our preferred stock for aggregate gross proceeds of at least $3 million (including this Note but excluding all proceeds from the incurrence of all other prior indebtedness that is converted into such preferred stock, or otherwise cancelled in consideration for the issuance of such preferred stock) with the principal purpose of raising capital, the note would be converted into preferred stock. The qualified financing term was triggered for this convertible note payable as $3 million was raised prior June 30, 2020 as discussed above. Therefore, the convertible note was converted to 89,859 shares of Series A Preferred Stock and is no longer reflected as outstanding as of December 31, 2020.
During 2020, we issued $45 thousand in convertible debt to the advisor. As of December 31, 2020, we had converted the $45 thousand in convertible debt to Series Preferred Stock at a value of $7.79 per share, and ultimately into Common Stock on December 8, 2020.
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Non-Convertible Promissory Notes Payable. On April 22, 2020, the Company entered into a promissory note for $350 thousand with Second Century Ventures (“SCV”) in which the Company received net proceeds of $345 thousand after issuance costs. The unpaid principal, together with any then unpaid and accrued interest and any other amounts payable was due and payable on April 22, 2021 or in an event of default or a change in control as defined in the agreement. The note accrued interest at a rate of 8% per annum, compounded monthly. The note was repaid in a timely manner.
With the issuance of the note on April 22, 2020, the Company entered into a warrant agreement to purchase Class A Shares of Common Stock of the Company with SCV. The warrant agreement issued SCV a warrant to purchase 75,000 shares at a strike price of $0.002 per share through April 22, 2021. At the expiration of the warrant agreement the warrants will be automatically exercised if the fair market value of the exercise shares exceeds the exercise price. If at any time during the term the fair market value of the exercise shares exceeds five times the exercise price the Company shall provide SCV written notice and SCV may elect to exercise the warrant. If at any time during the term of the warrant agreement any portion of the Class A Shares of Common Stock are converted to other securities the warrants shall become immediately exercisable for that number of shares of the other securities that would have been received if the warrant agreement had been exercised in full prior to the conversion and the exercise price shall be adjusted. We determined that the appropriate classification of this warrant was as an equity instrument that will not be subject to fair value remeasurement going forward.
As the promissory notes issued included equity classified warrants issued, U.S. GAAP requires that the proceeds from the sale of debt instruments with a separate equity instrument be allocated to the two elements based upon the relative fair values of the debt instrument without the warrant and of the warrant itself at the time of issuance. The portion of the proceeds allocated to the Class A Shares of Common Stock shall be accounted for within stockholders’ equity as additional paid-in capital and recorded as a debt discount and be charged to interest expense over the life of the convertible notes. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction. The value of the promissory note was allocated on a relative fair value basis between the note and the warrants. This allocation based upon relative fair values of the promissory note and warrant resulted in an amount of $88 thousand being allocated to the equity warrants and $262 thousand being allocated to the promissory notes, resulting in the same amount representing a discount to the promissory note. Accretion expense of $62 thousand was recorded and interest payable of $20 thousand was accrued related to these notes during the year ended December 31, 2020.
On June 11, 2020 we entered into an agreement with Emergent, as described below, whereby their SAFE would be extinguished in exchange for several forms of consideration. As part of that agreement, one form of consideration is that the Company issued promissory notes to Emergent in the amount of $387 thousand which is due in two tranches in August and September 2020. No interest is due and payable under these notes if we pay by the maturity dates previously described. We paid within the maturity date.
Warrants. In January 2020, the Company has issued to an investor a warrant to purchase 932,210 shares of the Company’s Class A Shares of Common Stock at an exercise of $1.60 per share in exchange for the cancellation of a $100 thousand SAFE issued on August 18, 2017 by the Company’s affiliate Trusted Mail Inc. with an agreed value of $125 thousand. See Note 4 to the financial statements included under Item 8 of this report for the reduction in SAFE liability for this amount. The warrants were issued on January 23, 2020. There is no vesting period, and the warrants expire on December 20, 2024.
In January 2020, the Company has issued to an investor a warrant to purchase 4,660,555 shares of the Company’s Class A Shares of Common Stock at a strike price of $1.60 per share in exchange for $300 thousand in cash and “Premium” sponsorship status with a credited value of $100 thousand per year for 3 years totaling $300 thousand. This “premium” sponsorship status provides the Company with certain benefits in marketing and networking, such as the Company being listed on the investor’s website, as well providing the Company certain other promotional opportunities organized by the investor. The warrants were issued on January 23, 2020. There is no vesting period, and the warrants expire on December 20, 2024.
The fair value of the two warrants above issued in January 2020 was estimated on the date of grant using the Black-Scholes-Merton model and was valued using the following assumptions: fair value of Class A Shares of Common Stock of $1.56, exercise price of $1.60 risk free interest rate of 1.58%, dividend yield of 0%, expected volatility of 44%, and contractual term of two years. The total fair value of these warrants was determined to be $2.1 million and is recorded in the consolidated statement of stockholders’ equity (deficit). Thus, fair value is $1.4 million in excess of the total consideration received for the warrants of $725 thousand. This amount is expensed within the consolidated statement of operation.
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Emergent and Tripartite Agreement
The Company and Emergent entered into a SAFE in which Emergent obtained the right to shares of the Company’s stock (purchase amount of $2.1 million and valuation cap of $20 million) that would be exercised upon a qualified equity financing. A put option also exists in this agreement in which at the earlier of 18 months from the agreement date and the date on which the Company has raised more than $7 million of qualified equity financing, Emergent may require repayment of the unrepaid element of the purchase amount and the Company would be required to make such repayment.
On February 4, 2020, the Company entered into a tripartite agreement with Emergent and 10Clouds whereby:
| · | The Company received a Purchase Order from Emergent in which Emergent requested $300 thousand worth of services to be provided by the Company under mutually agreed statements of work from the effective date through December 31, 2020. The intention of these services is to reduce the Emergent SAFE amount owed by the Company. |
| · | The Company will enter into statements of work with 10Clouds for appropriate sub-contract work under the Purchase Order. |
| · | The Company issued an additional SAFE to 10Clouds for $200 thousand subject to an absolute right for the Company at its option to redeem that $200 thousand for cash or settle it through the conversion to Series A preferred stock. |
| · | Emergent reduces the balance due on the Emergent SAFE by $500 thousand with immediate effect and asserts the outstanding balance to be $1.6 million. |
| · | On June 11, 2020, the Company entered into additional agreement with Emergent whereby: |
| · | Emergent will issue an irrevocable Purchase Order for $500 thousand worth of services to be provided by the Company under mutually agreed statements of work from the effective date through December 31, 2020. We subsequently entered into an SOW with 10Clouds for $500 thousand to provide the requested services. |
| · | Emergent forgave $104 thousand of the value of the SAFE to represent expected profit margin for the $500 thousand worth of services described above. |
| · | The Company issued $400 thousand of Class A Shares of Common Stock to Emergent’s designated assignees at a price of $1.56 per share (256,740 shares). This has been reflected in the statement of stockholders’ equity as of September 30, 2020. |
| · | The Company paid Emergent $220 thousand and this has been reflected in the statement of cashflows. |
| · | The Company entered into a promissory note with Emergent for $387 thousand payable which has been paid and reflected in the statement of cashflows. |
The intention of the above services and transactions is to wholly settle the SAFE and as of December 31, 2020, the Emergent SAFE was extinguished in full. The Company converted the $200 thousand SAFE note into 25,674 shares of Series A Preferred Stock which was subsequently converted to Class A Shares of Common Stock on September 8, 2020 along with all shares of Series A Preferred Stock.
Regulation A Warrant Offering. On January 26, 2022, the Company commenced an offering pursuant to Regulation A in which it qualified for issuance 1,435,068 shares of our Class A Common Stock that may be issued upon exercise of the warrants of the Company issued in the Company’s Regulation Crowdfunding offering (the “Reg CF Warrants”), the Company’s Regulation D offering (the “Reg D Warrants”), and the Company’s Regulation S offering (the “Reg S Warrants”). The Reg CF Warrants, Reg D Warrants, and Reg S Warrants are exercisable into Class A Common Stock of our Company at an exercise price of $4.00 per share, for maximum gross proceeds of $5,740,272. As of the date of this report, the Company has received $57 thousand in proceeds from the exercise of 14,250 warrants in this offering.
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Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:
| For the years ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash flows from operating activities | $ | (6,714,474 | ) | $ | (4,482,670 | ) | ||
| Net cash flows from investing activities | $ | (768,353 | ) | $ | (512,165 | ) | ||
| Net cash flows from financing activities | $ | 9,349,770 | $ | 6,087,893 | ||||
Operating Activities
Net cash used in operating activities of $6.71 million for the year ended December 31, 2021 was primarily related to net loss of $9.06 million and changes in net operating assets and liabilities of $1.36 million which is offset by non-cash charges of $2.78 million related to stock based compensation and $574 thousand related to depreciation and amortization expense. The net change in operating assets and liabilities were primarily due to an increase in accounts receivable of $1.14 million, increase in prepaid expenses and other current assets of $538 thousand, increase in accounts payable and accrued expenses of $177 thousand, an increase in deferred revenue of $34 thousand, and an increase in customer deposit liabilities of $280 thousand.
Net cash used in operating activities of $4.48 million for the year ended December 31, 2020 was primarily related to net loss of $10.68 million and change in net operating and assets and liabilities of $1.3 million which is offset by non-cash charges of $2.52 million related to stock based compensation, depreciation and amortization expense of $406 thousand, noncash warrant expense of $1.41 million, non-cash revenue related to Emergent termination of $904 thousand, and the write off of investment in Emergent amounting to $962 thousand. The net change in operating assets and liabilities were primarily due to an increase in other assets of $151 thousand, increase in accounts payable and accrued expenses of $985 thousand, increase in related party payables of $250 thousand and an increase in deferred revenue of $328 thousand.
Investing Activities
Net cash used in investing activities of $768 thousand for the year ended December 31, 2021 was related to amount capitalized for internal developed software of $482 thousand, cost related to patent application of $161 thousand, acquisition of Pixelpin intangible assets of $91 thousand, and purchases of property and equipment of $34 thousand.
Net cash used in investing activities of $512 thousand for the year ended December 31, 2020 was related to amount capitalized for internal developed software of $360 thousand, cost related to patent application of $22 thousand and purchase of property and equipment of $130 thousand.
Financing Activities
Net cash provided by financing activities of $9.35 million for the year ended December 31, 2021 was primarily related to proceeds from issuance of common stock for $8.76 million, soft loan and grant proceeds from the government of Malta of $856 thousand, and the repayment of the promissory note payable with SCV of $344 thousand.
Net cash provided by financing activities of $6.09 million for the year ended December 31, 2020 was primarily related to proceeds from issuance of Series A preferred stock of $6.80 million, proceeds from issuance of common stock of $264 thousand, proceeds from issuance of Series A preferred stock warrants of $300 thousand, proceeds from debt of $345 thousand which was offset by issuance cost of $1.00 million and repayment of SAFE note of $607 thousand.
Liquidity
The accompanying 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 year ended December 31, 2021 of $9.06 million, operating cash outflows of $6.71 million for the same period, and an accumulated deficit of $27.21 million as of December 31, 2021.
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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. Management has evaluated these conditions and due to the capital raise as discussed in Note 17 to the financial statements included under Item 8, we believe that we have sufficient liquidity to support the planned operations of our business for twelve months from the date these financials are issued.
Commitments and Contractual Obligations
The following table summarizes our non-cancellable contractual obligations as of December 31, 2021:
| Payments Due by Period | ||||||||||||||||
| Less Than | ||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | |||||||||||||
| Operating lease obligations | $ | 577,471 | $ | 370,493 | $ | 143,152 | $ | 63,826 | ||||||||
| Purchase obligations | — | — | — | — | ||||||||||||
| Total contractual obligations | $ | 577,471 | $ | 370,493 | $ | 143,152 | $ | 63,826 | ||||||||
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.
Off-Balance Sheet Arrangements
We did not have, during the years ended December 31, 2021 and 2020, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes
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.
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.
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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, phones, 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 phones 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 phones and services to assist ICE from the total transaction price.
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 contract 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.
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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.
Remaining Performance Obligation
Our remaining performance obligations are comprised of product and services revenue not yet delivered.
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 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 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.
Simple Agreements for Future Equity (“SAFEs”)
The Company has issued several SAFEs in exchange for cash financing. These funds were classified as long-term liabilities The Company accounted for its SAFEs as liability derivatives under ASC 815, Derivatives and Hedging. If any changes in the fair value of the SAFEs occurred, the Company would have recorded such changes through earnings, under the guidance prescribed by ASC 825-10.
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Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, refer to Note 1 to the financial statements included under Item 8. Description of Business and Summary of Significant Accounting Policies in our consolidated financial statements included elsewhere in Form 10-K.
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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports 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 decisions regarding required disclosure. Management necessarily applied judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives.
As of the end of the period covered by this annual report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness, design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures were not effective based on material weaknesses in our internal control over financial reporting described below. Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in the Original Filing present fairly, in all material respects, the Company’s financial position, results of operations, and cash flows as of the dates, and for the periods presented, in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
Management’s Report on Internal Controls Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
However, 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 (1) certain corporate finance and accounting oversight functions residing over the detection of errors that were present within the Company’s calculation of stock-based awards and (2) the financial reporting close process.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
See “Index to Consolidated Financial Statements” in Part II, Item 8 of the Original Filing. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notes.
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Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
25
* Filed herewith.
** Previously filed
26
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| T STAMP INC. | |
| /s/ Gareth Genner | |
| Gareth Genner, Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Gareth Genner | |
| Gareth Genner, Principal Executive Officer, Chief Executive Officer, Director | |
| Date: December 22, 2022 |
| /s/ Alex Valdes | |
| Alex Valdes, Principal Financial Officer, Principal Accounting Officer | |
| Date: December 22, 2022 |
| /s/ Andrew Gowasack | |
| Andrew Gowasack, President, Director | |
| Date: December 22, 2022 |
| /s/ David Story | |
| David Story, Director | |
| Date: December 22, 2022 |
| /s/ William McClintock | |
| William McClintock, Director | |
| Date: December 22, 2022 |
| /s/ Mark Birschbach | |
| Mark Birschbach, Director | |
| Date: December 22, 2022 |
| /s/ Joshua Allen | |
| Joshua Allen, Director | |
| Date: December 22, 2022 |
| /s/ Kristin Stafford | |
| Kristin Stafford, Director | |
| Date: December 22, 2022 |
| /s/ Berta Pappenheim | |
| Berta Pappenheim, Director | |
| Date: December 22, 2022 |
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Exhibit 31.1
CERTIFICATIONS
I, Gareth Genner, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2021 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. [Omitted]
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: December 22, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021 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. [Omitted]
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: December 22, 2022 | |
| /s/ Alex Valdes | |
| Alex Valdes | |
| Chief Financial Officer | |
| Principal Financial Officer |