T Stamp Inc IDAI US Equity☆

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.

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.

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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:

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,

Add: Other expense ​ 159,533 ​ —

Add: Warrant expense ​ — ​ 1,413,273

Add: Impairment of investment in related party ​ — ​ 962,000

Add: Non-cash expenses for in-kind services ​ 261,794 ​ 93,100

​

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.

Gross sales (non-GAAP)

This discussion includes information about gross sales hat is not prepared in accordance with U.S. GAAP. Gross sales 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.

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Gross sales for the year ended December 31, 2021 increased 40% to $4.0 million compared to $2.9 million for year ended December 31, 2020. The increase of gross sales in the year ended December 31, 2021 is primarily attributable to new sales of $1.7 million generated through the execution of the ICE contract, which is further discussed in the “Key Customer” section of Part 1, Item 1. Due to GAAP requirements, we did not include the third-party costs for web hosting in net sales, but instead, reduced Cost of Services.

​

​ ​ ​ ​ ​ ​ ​

​ For the year ended December 31,

Add back: ​ ​ ​ ​

Third party costs accrued and rebilled to clients ​ 348,642 ​ 224,020

​ ​ ​ ​ ​ ​ ​

​

Financial Highlights (non-GAAP) Three-Months and Year Ended December 31, 2021

Key Business Measures

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the three-months ended For the year ended

​ ​ Amount ​ Margin ​ Amount ​ Margin

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Growth compared to prior year period ​ 69.71 % ​ ​ 38.88 % ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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 ​

Add: Non-cash expenses for in-kind services ​ ​ 177,930 ​ 261,794 ​

Adjusted operating margin ​ ​ (27.68) % ​ (143.42) %

​

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Adjusted Free Cash Flow

​ ​ ​ ​ ​ ​ ​ ​

​ For the three-months ended For the year ended

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) ​

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 ​

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 ​

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

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

Operating Expenses: ​ ​ ​ ​

Non-Operating Income (Expense): ​ ​ ​ ​

Change in fair value of warrant liability ​ (86,944) ​ —

Impairment of investment in related party ​ — ​ (962,000)

Income tax expense ​ — ​ —

Net loss attributable to noncontrolling interest ​ ​ (1,743) ​ ​ (63)

​

​

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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,

Operating Expenses: ​ ​ ​ ​ ​

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 sales

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the years ended December 31,

​

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,

​

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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,

​

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,

​

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,

​

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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,

​

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,

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,

​

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,

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,

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​

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.

Other income

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the years ended December 31,

​

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,

​

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 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,

Net cash flows from operating activities ​ $ (6,714,474) ​ $ (4,482,670)

Net cash flows from investing activities ​ $ (768,353) ​ $ (512,165)

​

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

Purchase obligations ​ — ​ — ​ — ​ —

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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;

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.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.

​

​

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

​

To the Board of Directors and Shareholders

T Stamp Inc. and Subsidiaries

Atlanta, Georgia

​

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of T Stamp Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America (“U.S.”).

​

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (U.S.) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

​

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

​

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

​

Emphasis of Matter Regarding Liquidity

As discussed in Note 1 to the consolidated financial statements, the Company has not yet generated profits and has recorded a loss of $9.1 million for the year ended December 31, 2021, operating cash outflows of $6.7 million for the year ended December 31, 2021, and an accumulated deficit of $27.2 million as of December 31, 2021. Management’s evaluation of the conditions and management’s plans to mitigate these conditions are also described in Note 1. Our opinion is not modified with respect to this matter.

​

/s/ Cherry Bekaert LLP

​

We have served as the Company’s auditor since 2017.

​

Atlanta, Georgia

April 6, 2022

​

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T STAMP INC.

CONSOLIDATED BALANCE SHEETS

​ ​ ​ ​ ​ ​ ​

​ ​ As of December 31,

ASSETS ​ ​

Current Assets: ​ ​

Prepaid expenses and other current assets ​ 996,602 ​ 458,995

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ​ ​

Current Liabilities: ​ ​

Customer deposit liabilities ​ 280,108 ​ —

​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

Commitments and Contingencies, Note 14 ​ ​

​ ​ ​ ​ ​ ​ ​

Stockholders' Equity: ​ ​

Accumulated other comprehensive income ​ 183,900 ​ 45,100

​

The accompanying notes to the consolidated financial statements are an integral part of these statements.

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T STAMP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

​ ​ ​ ​ ​ ​ ​

​ For the years ended December 31,

Operating Expenses: ​ ​

Non-Operating Income (Expense): ​ ​

Change in fair value of warrant liability ​ (86,944) ​ —

Impairment of investment in related party ​ ​ — ​ ​ (962,000)

Income tax expense ​ — ​ —

Net loss attributable to noncontrolling interest ​ (1,743) ​ (63)

​

The accompanying notes to the consolidated financial statements are an integral part of these statements.

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T STAMP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

​ ​ ​ ​ ​ ​ ​

​ For the years ended December 31,

Other Comprehensive Income: ​ ​

Foreign currency translation adjustments ​ 138,800 ​ 45,133

Comprehensive loss attributable to noncontrolling interest ​ (1,743) ​ (63)

Comprehensive loss attributable to T Stamp Inc. ​ $ (8,918,363) ​ $ (10,638,428)

​

The accompanying notes to the consolidated financial statements are an integral part of these statements.

​

​

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T STAMP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​

​ ​ Series A ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ ​ ​ Stockholders' ​ ​ Other ​ ​ ​ ​

Issuance of common warrants — ​ — — ​ — ​ 88,000 — ​ — ​ — ​ — ​ — ​ — ​ 88,000

​

The accompanying notes to the consolidated financial statements are an integral part of these statements.

​

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T STAMP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

​

​ ​ ​ ​ ​ ​ ​

​ For years ended December 31,

Cash flows from operating activities: ​ ​

Net loss attributable to noncontrolling interest ​ (1,743) ​ (63)

Noncash payment to Euronext advisor ​ ​ — ​ ​ 155,800

Noncash payment to Ridgegrowth ​ — ​ 47,672

Change in fair value of warrant liability ​ ​ 86,944 ​ ​ —

Noncash warrant expense ​ — ​ 1,413,273

Noncash interest expense ​ — ​ 185,599

Noncash revenue related to Emergent termination ​ — ​ (904,777)

Repayment of shareholder loans through in-kind services ​ 261,794 ​ 93,100

Write off of investment in Emergent ​ ​ — ​ ​ 962,000

Changes in assets and liabilities: ​ ​ ​ ​

Related party receivables ​ 857 ​ 1,817

Prepaid expenses and other current assets ​ (537,607) ​ (36,305)

Customer deposit liabilities ​ ​ 280,108 ​ ​ —

​ ​ ​ ​ ​ ​ ​

Cash flows from investing activities: ​ ​ ​

Purchases of property and equipment ​ (34,217) ​ (130,128)

Capitalized internally developed software costs ​ (482,219) ​ (359,919)

Acquisition of Pixelpin intangible asset ​ (90,621) ​ —

Net cash flows from investing activities ​ (768,353) ​ (512,165)

Cash flows from financing activities: ​ ​ ​ ​

Proceeds from issuance of common stock warrant ​ 1,129,535 ​ —

Proceeds from exercise of warrants to common stock ​ 150 ​ —

Proceeds from loan from Maltese government ​ 856,258 ​ —

Repayment of debt ​ (344,219) ​ ​ —

Proceeds from repayment of shareholder loan ​ 75,000 ​ ​

Proceeds from issuance of Series A Preferred Stock ​ — ​ 6,789,303

Issuance costs of Series A Preferred Stock ​ — ​ (1,003,111)

Proceeds from issuance of Series A Preferred Stock warrants ​ — ​ 300,000

Proceeds from debt, net of issuance cost ​ ​ — ​ ​ 345,000

Repayment of SAFE note ​ — ​ (607,176)

Effect of foreign currency translation on cash ​ 138,800 ​ 45,133

Cash and cash equivalents, beginning of year ​ ​ 1,469,952 ​ ​ 331,761

​ ​ ​ ​ ​ ​ ​

Supplemental disclosure of cash flow information: ​ ​ ​ ​

Cash paid during the year for interest ​ $ 30,215 ​ $ 128

​ ​ ​ ​ ​ ​ ​

Supplemental disclosure of noncash activities: ​ ​

Extinguishment of SAFE for common stock warrants ​ $ — ​ $ 125,000

Issuance of common stock warrants for a prepaid sponsorship ​ $ — ​ $ 300,000

Assignment of Emergent SAFE note to 10Clouds ​ $ — ​ $ 200,000

Preferred stock conversion to common stock ​ $ ​ ​ $ 8,299,175

Stockholder notes receivable ​ $ — ​ $ 335,161

​

The accompanying notes to the consolidated financial statements are an integral part of these statements.

​

​

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1. Description of Business and Summary of Significant Accounting Policies

Description of Business- T Stamp Inc. was incorporated on April 11, 2016 in the State of Delaware. T Stamp Inc. and Subsidiaries (“Trust Stamp”, the “Company”, or “We”) develops and markets identity authentication software solutions for government and enterprise partners and peer-to-peer markets. The Company's patented proof of liveness technology allows the Company to provide a unique suite of facial biometric based products that address critical needs in the financial, real estate, healthcare, insurance and P2P markets. The Company’s target markets and existing partnerships are characterized by the growing use of cyber connections to establish relationships requiring secure identification. The Company’s products address compliance issues such as Know Your Customer and Anti-Money Laundering as well as safety issues in various industries. Wherever there is a cyber relationship and/or a need for the trusted, secure identification/recognition of the parties to a transaction, Trust Stamp is developing unique products for which there is a growing demand.

Trust Stamp develops proprietary artificial intelligence powered solutions; researching and leveraging biometric science, cryptography, and data mining to deliver insightful identity and trust predictions while identifying and defending against fraudulent identity attacks. We utilize the cutting-edge power and agility of technologies such as GPU processing and neural networks to process data faster and more effectively than has ever previously been possible as well as deliver 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

Stock Split - On August 18, 2021, by written consent of the stockholders, the Company effected a 5-for-1 forward stock split. All share and per share amount in these consolidated financial statements have been retroactively restated to reflect the stock split. The stock split was effective for trading on the market opening of both Euronext Growth and OTCQX on August 23, 2021.

Series A Preferred Stock Offering- On July 17, 2020, we closed our Stock offering, which launched in September 2019, through a combination of private placements, including convertible notes and investments through the Seed Invest platform. We issued through 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. As of December 31, 2020, we received gross proceeds of $8.40 million and $7.40 million in cash, net of offering costs of $1.00 million, from this offering through a combination of cash and original investment in convertible notes issued in 2019 that have converted as of December 31, 2020.

In addition to the gross cash proceeds above, as part of the capital raise, the Company also reserved $400 thousand of Class A Common Stock for a portion of the outstanding Emergent SAFE as discussed in Note 5 to the financial statements included under Item 8. The Company also reserved stock options and restricted stock awards for employee grants in 2020. Finally, the Company sold warrants for Series A Preferred Stock shares for $600 thousand which is further discussed in Note 4 to the financial statements included under Item 8.

On September 8, 2020, the Company and a majority of the shareholders voted to convert all Series A Preferred Stock to Class A Common Stock.

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Regulation D Common Stock Offering - On March 12, 2021, the Company launched a Regulation D offering for Class A Common Stock to accredited investors for $5.00 million or 1,633,986 shares. The raise was marketed to the Company’s existing investor email list as well as new investors 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 $3.92 million of reserved investment with the contracted sale of 1,279,825 shares of Class A Common Stock. After the initial phase, 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 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 with the contracted sale of 21,400 shares of Class A Common Stock. The Company incurred offering costs of $61,582 from this offering that were recorded as a reduction of the gross proceeds.

Regulation CF, D, and S Common Stock and Warrant Offering - On August 25, 2021, the Company launched concurrent offerings under Regulation Crowdfunding (“Regulation CF”), Regulation D and Regulation S. The Company initially sought to raise up to $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.

For the combined Regulation CF, Regulation D, and Regulation S offerings as of December 31, 2021, we have received gross proceeds of $5,431,852 in cash from the issuance of 1,357,963 units from this offering. The Company incurred offering costs of $621,225 from this offering that were recorded as a reduction of the gross proceeds as of December 31, 2021. In connection to this offering, the Company received $308,420 in gross proceeds from the issuance of 77,105 units to investors after December 31, 2021.

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.

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 12 months from the date these financials are issued.

Basis of Consolidation and Presentation-The accompanying consolidated financial statements reflect the activity of the Company and its subsidiaries, Trusted Mail Inc. (“Trusted Mail”), Sunflower Artificial Intelligence Technologies (“SAIT”), Finnovation LLC (“Finnovation”), Trust Stamp Malta Limited (“Trust Stamp Malta”), AIID Payments Limited, Biometric Innovations Limited (“Biometrics”), Trust Stamp Rwanda Limited, and Metapresence Limited. All significant intercompany transactions and accounts have been eliminated.

The Company has entered joint ventures with Biometric Innovations Limited (formerly “Trust Stamp Fintech Limited”) and Trust Stamp Cayman. Biometric Innovations Limited is a company incorporated in the United Kingdom by the Company’s management. The purpose of this entity was to establish beachhead operations in the country in order to service a contract entered by the Company with the National Association of Realtors and Property Mark. This entity remains separate from the Company’s operations and serves as a sales and marketing function for the product “NAEA” which was developed for the contract between the listed parties. Trust Stamp Cayman was established with the intention of taking advantage of enterprise grants which were offered by the Cayman National Government’s Enterprise Zone. No operations were established. Due to common ownership of the Company and these two entities, the Company has funded all operating expenses since inception and as a result, the operations of these entities are included in the consolidated financial statements. On June 11, 2020, the Company entered into a stock exchange with Biometric Innovations Limited, becoming a 100% owner. At December 31, 2021, Biometric Innovation Limited is included as a consolidated entity within the December 31, 2021 financial statements.

Further, we continue to consolidate Tstamp Incentive Holdings “TSIH” which we consider to be a variable interest entity.

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Variable Interest Entity- On April 9, 2019, management created a new entity, TSIH. Furthermore, on April 25, 2019, the Company issued 1,602,565 shares of Class A Shares of Common Stock to TSIH that the Board can use for employee stock awards in the future and was recorded initially as treasury stock. On January 8, 2021, 1,033,335 shares were transferred to various employees as a stock award that was earned and outstanding on December 8, 2020 upon the Company being listed on a public market. The remaining 282,565 shares are earmarked for the 2020 employee RSU bonus and recorded to treasury stock as of December 31, 2021.

The Company does not own any of the stock in TSIH; however, it is held by members of the Company’s management. The Company considers this entity to be a variable interest entity (“VIE”) because it is thinly capitalized and holds no cash. Because the Company does not own shares in TSIH, management believes that this gives the Company a variable interest. Further, management of the Company also acts as management of TSIH and is the decision maker as management grants shares held by TSIH to employees of the Company. As this VIE owns only shares in the Company and no other liabilities or assets, the Company is the primary beneficiary of TSIH and will consolidate the VIE.

Use of Estimates – The preparation of the consolidated financial statements in conformity U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates that include, but are not limited to, percentage of completion related to revenue contracts that are not fully complete at the end of a fiscal year, capitalization and estimated useful life of internal-use software, the allowance for doubtful accounts, the fair value of financial assets and liabilities, the useful lives of property and equipment and intangible assets, the recoverability of goodwill, stock-based compensation including the determination of the fair value of our common stock, impairment of long-lived assets, the valuation of deferred tax assets and uncertain tax positions, warrant liabilities, and Simple Agreements for Future Equity (“SAFE”) liabilities. We base our estimates on assumptions, both historical and forward-looking trends, and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

The World Health Organization declared in March 2020 that the outbreak of the coronavirus disease (“COVID-19”) constituted a pandemic. The COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020. The Company assessed the impacts of the novel coronavirus pandemic on its various accounting estimates and significant judgments, including those that require consideration of forecasted financial information in the context of the unknown future impacts of COVID-19, using information that is reasonably available at this time. The accounting estimates and other matters assessed included, but were not limited to, capitalized internal-use software, the recoverability of goodwill, long-lived assets and investments recorded at cost, useful lives associated with intangible assets and capitalized internal-use software, and the valuation and assumptions underlying stock-based compensation, and warrant liabilities. Based on the Company’s current assessment of these estimates, there was not a material impact to the consolidated financial statements as of and for the year ended December 31, 2021. As additional information becomes available, the Company’s future assessment of these estimates, including updated expectations at the time regarding the duration, scope and severity of the pandemic, could materially and adversely impact its consolidated financial statements in future reporting periods.

Segment Information- The Company has a single operating and reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources.

Risks and Uncertainties-The Company is dependent upon additional capital resources for its planned full-scale operations and is subject to significant risks and uncertainties, including failing to secure funding to continue to operationalize the Company’s plans or failing to profitably operate the business.

Major Customers and Concentration of Risks-Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. We maintain our cash and cash equivalents with high-quality financial institutions mainly in the United States, the composition of which are regularly monitored by us. The Federal Deposit Insurance Corporation covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. As of December 31, 2021 and 2020, the Company had in U.S. bank accounts $2.25 million and $300 thousand, respectively, which exceeded these insured amounts. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts.

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For accounts receivable, we are exposed to credit risk in the event of nonpayment by customers to the extent the amounts are recorded in the consolidated balance sheets. We extend different levels of credit to online merchants and maintain reserves for potential credit losses based upon the expected collectability of accounts receivable. We manage credit risk related to our customers by performing periodic evaluations of credit worthiness and consumer indebtedness and applying other credit risk monitoring procedures.

One customer represented 51% and 95% of the balance of total accounts receivable as of December 31, 2021 and 2020. Two other customers represented 41% of total accounts receivable as of December 31, 2021 and no other customer represented more than 10% of total accounts receivable as of December 31, 2020. The Company seeks to mitigate its credit risk with respect to accounts receivable by contracting with large commercial customers and government agencies and regularly monitoring the aging of accounts receivable balances. As of December 31, 2021 and 2020, the Company had not experienced any significant losses on its accounts receivable.

During the year ended December 31, 2021, the Company sold to primarily three customers which made up approximately 91% of total net sales. The remaining revenue recognized during the year ended December 31, 2021, which made up approximately 9% of total net sales, was from various other customers.

Additionally, for the year ended December 31, 2020, the Company sold to two customers which made up approximately 63% of total net sales. The remaining net sales recognized during the year ended December 31, 2020, which made up approximately 37% of total net sales, related to the Tripartite Agreement with Emergent Technology Holdings LP (“Emergent”) as described in Note 5 to the financial statements included under Item 8.

The loss of or a substantial reduction in statements of work from the Company’s major customers could have a material effect on the consolidated financial statements.

Foreign Currencies - The functional currencies of the Company’s foreign subsidiaries are the local currencies. For those subsidiaries, the assets and liabilities are translated into U.S. dollars at the exchange rate method at the consolidated balance sheet date. The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments related to the Company’s foreign subsidiaries. Income and expenses are translated at the average exchange rates for the period. Foreign currency transaction gains and losses are included in other income or other expense in the consolidated statements of operations.

Cash and Cash Equivalents - Cash and cash equivalents consist of cash in banks and bank deposits. The Company considers all highly liquid instruments purchased with an original maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts, if any. Allowance for doubtful accounts is based on the Company’s best estimate of probable losses inherent in its accounts receivable portfolio and is determined based on expectations of the customer’s ability to pay by considering factors such as historical experience, financial position of the customer, age of the accounts receivable, current economic conditions, including the ongoing COVID-19 pandemic, and as well as reasonable and supportable forward-looking factors about its portfolio and future economic conditions. Accounts receivable are written-off and charged against an allowance for doubtful accounts when the Company has exhausted collection efforts without success. No allowance for bad debts has been established. Bad debts are recognized when they are deemed uncollectible, and management considers all present receivables fully collectible.

As of December 31, 2021 and 2020, accounts receivable includes unbilled receivables of $109 thousand and $0, respectively.

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Property and Equipment, Net - Property and equipment, net are stated at cost less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed when incurred whereas additions and major improvements are capitalized. Upon sale or retirement of assets, the cost and related accumulated depreciation and are derecognized from the consolidated balance sheet and any resulting gain or loss is recorded in the consolidated statements of operations in the period realized.

Capitalized Internal-Use Software, Net - Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development are capitalized. The Company capitalizes eligible costs to develop internal-use software that are incurred subsequent to the preliminary project stage through the development 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.

Business and Asset Acquisitions - When the Company acquires a business, the purchase price is allocated to the tangible and identifiable intangible assets, net of liabilities assumed. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

The Company accounts for a transaction as an asset acquisition pursuant to the provisions of ASU No. 2017-01, Clarifying the Definition of a Business, when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, or otherwise does not meet the definition of a business. Asset acquisition-related costs are capitalized as part of the asset or assets acquired.

Accounting for Impairment of Long-Lived Assets - Long-lived assets with finite lives include property and equipment, capitalized internal-use software, and intangible assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company determined that as of December 31, 2021 and 2020, no property and equipment, capitalized internal-use software, and intangible assets, were impaired.

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Goodwill – Goodwill is accounted for in accordance with FASB ASC 350, Intangibles—Goodwill and Other. The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase consideration transferred over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill. Goodwill is tested for impairment at the reporting unit level at least annually or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill for impairment, the Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In the qualitative assessment, the Company considers factors including economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Should the Company conclude that it is more likely than not that the recorded goodwill amounts have been impaired, the Company would perform the impairment test. Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value. Significant judgment is applied when goodwill is assessed for impairment. There were no impairment charges to goodwill during the years ended December 31, 2021 and 2020.

Fair Value of Assets and Liabilities – The Company follows the relevant U.S. GAAP guidance regarding the determination and measurement of the fair value of assets/liabilities in which fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction valuation hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The guidance describes the following three levels of inputs that may be used in the methodology to measure fair value:

Level 1 – Quoted prices available in active markets for identical investments as of the reporting date;

Level 2 – Inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date; and

Level 3 – Unobservable inputs, which are to be used in situations where there is little or no market activity for the asset or liability and wherein the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The estimated fair values of cash, accounts receivable, related party receivables, prepaid expenses and other current assets, other assets, accounts payable, related party payables, accrued expenses, deferred revenue, customer deposit liabilities, nonconvertible notes payable, and SAFE liabilities approximate their carrying values. The Company accounts for its financial assets and liabilities at fair value regularly. The Company evaluates the fair value of its non-financial assets and liabilities on a nonrecurring basis.

Revenue Recognition – The Company derives its revenue primarily from professional services. Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, the Company includes an estimate of the amount it expects to receive or the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.

The Company determines the amount of revenue to be recognized through the application of the following steps:

● Identification of the contract, or contracts with a customer;

● Identification of the performance obligations in the contract;

● Determination of the transaction price;

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