T STAMP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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 Company be adopted April 11, 2016 inside Delaware. T Stamp Company and its subsidiaries (“Trust Stamp”, “we” or the “Company”) develop and sell identity authentication software for business 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:
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Data security and fraud
? In 2021, 4,145 publicly disclosed breaches exposed over 22 billion records
A quick look at the report based on the year-end 2021 data breach.
Estimate e-commerce, air tickets, money transfer and banking services
? Cumulative loss $200 billion by 2020 and
2024, according to 2020 Juniper Networks Research Online Payment Fraud Reporting.
Biometric authentication
? Juniper Networks Research estimates that biometrics will $3
By 2025, payment transactions will reach trillions.
The global biometric systems market is expected to grow from $24.1 billion exist
? 2020 to $82.8 billion By 2027 according to 2021 global industry analyst firm
Report.
Financial and Social Inclusion
As of 2017, 1.7 billion people lacked basic financial services, including banking
? 4 billion people are underfunded in the account. World Bank
2017 Global Findex Report. (Note: Estimates for people lacking basic finances
services now approaching 1.4 billion people).
More than 200 million SMEs in emerging markets
? Lack of access to financing, limiting their ability to grow and prosper (UNGSA
financial inclusion)
The global microfinance market is estimated to be $156.7 billion in this year
? In 2020, it is expected to reach $304.3 billion By 2026, according to the global
Microfinance Market Report 2022.
Alternatives to Detention (“ATD”)
solve House Appropriations Subcommittee for Homeland Security in May
January 17, 2022 ICE Acting Director Says Fiscal Year 2023 Budget
? Submitted by ICE for approval, which includes an additional $75,000,000 For ATD
beyond the current funding program, and ICE is “focusing on
ATD” rather than the more expensive physical detention program; both because
The threat of COVID, and because ATD is cheaper and more humane.
On the same day, the ranking members of the subcommittee shared 230,000
? Participant is currently participating in the ATD program with plans to increase to
600,000 participants.
Bipartisan appropriations committee recommends increasing
$42,186,000 Exceeds requests made by ICE, totaling $569,319,000 for
? Fiscal 2023 funding to increase enrollment
Detention and security file procedures, and case management services and
participate.
Our clients and business –
The main submarkets of Trust Stamp are:
i) identity verification for account opening, access and fraud detection;
ii) create tokenized digital identities to promote financial and social inclusion; and
iii) In-community case management services for government agencies
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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 key submarkets, the company is developing products and collaborating with partners and industry organizations in other areas that provide significant market opportunities, particularly travel, healthcare, the Metaverse platform, and custody of cryptographic keys and account credentials.
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.
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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 or in lieu of our analysis of results reported in accordance with GAAP. Some of these limitations are:
o Adjusted EBITDA does not reflect our cash outlays or future requirements
For capital expenditures or contractual commitments.
o Adjusted EBITDA does not reflect our changes or cash requirements
working capital requirements.
While depreciation and amortization are non-cash expenses, asset
o Depreciation and amortization charges will frequently need to be replaced in the future, and
Adjusted EBITDA does not reflect any cash requirements for such replacements.
Adjusted EBITDA excludes the effect of certain charges or gains
o results from what we believe do not represent what we are doing
operate.
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 30nine months end 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.
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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.
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Comparison of three and nine months ending 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
End of three months comparison 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.
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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").
Sales, General and Administration
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.
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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.
within three months of ending September 30, 2022,one left $92,000
SG&A increase $25,000 to $117,000 From corporate and business travel expenses associated with industry events, conferences with potential clients, and investor meetings.
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 results in additional capitalization of internally used software amortization or microservices, and once technical feasibility is reached, the company begins to capitalize and subsequently amortize the associated costs over a 5-year period.
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.
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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.
Changes in fair value of warrant liabilities
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.
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Other expense
Three months ended September 30,
2022 2021 $ Change % Change
Other expense $ (7,484) $ (49,178) $ 41,694 -84.78 %
Reduced other expenses $42,000 end of three months September 30, 2022compared to the ending three months September 30, 2021. Company records $48,000 Unrealized exchange losses for 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 at the end of nine months 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.
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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.
Sales, General and Administration
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 SG&A fee increase up to 9 months
September 30, 2021 by the end of nine months September 30, 2022 Mainly driven by the increase in SG&A FTE and related overheads.
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.
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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 results in additional capitalization of internally used software amortization or microservices, and once technical feasibility is reached, the company begins to capitalize and subsequently amortize the associated costs over a 5-year period.
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.
Changes in fair value of warrant liabilities
Nine months ended
September 30,
2022 2021 $
Change % Change in fair value of warrant liabilities $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) %
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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 $5000 or 48.73% as of 9 months
September 30, 2022compared to the ending nine months 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.
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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.
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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.
superior September 23, 2021The company won $3,920,764 Contract with ICE (“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
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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.
Continue to operate
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.
Stocks, 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.View more information on securities purchase agreements Armistice Capital Master Fund Ltd. in the liquidity and capital resources subsection above.
business 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.
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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.
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The key accounting policies and estimates, assumptions and judgements that we believe have the greatest impact on our consolidated financial statements are described below.
Capitalize Internally Used Softwarenetwork
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 by the following steps:
? Identifying contracts or contracts with customers;
? Identify performance obligations in contracts;
? Determine the transaction price;
? Allocation of transaction price to performance obligations
contract; and
• Recognize revenue when or when the company meets performance
obligation.
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,
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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.
The cost of obtaining and fulfilling the contract
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
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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 tax
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 Announcements
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
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Various reporting requirements that apply to other Exchange Act reporting companies that are not “emerging growth companies” include, but are not limited to:
? Not required to comply with auditor certification requirements
Section 404 of the Sarbanes-Oxley Act;
? Take advantage of extended time to comply with certain new or revised
financial accounting standards;
? Be allowed to comply with the reduced disclosure obligations
executive compensation in our periodic reports and proxy statements; and
Exemption from the requirement to hold a non-binding advisory vote on
? Executive compensation and shareholder approval for any golden parachute
A previously unapproved payment.
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.
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