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 “Statement 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
Trust Stamp was incorporated under the laws of the State of Delaware on April 11, 2016 as “T Stamp Inc.” T Stamp Inc. and its subsidiaries (“Trust Stamp”, “we”, or the “Company”) develop and market identity authentication software for enterprise and government partners and peer-to-peer markets.
Trust Stamp develops proprietary artificial intelligence-powered identity and trust solutions at the intersection of biometrics, privacy, and cybersecurity, that enable organizations to protect themselves and their users while empowering individuals to retain ownership of their identity data and prevent fraudulent activity using their identity.
Trust Stamp tackles industry challenges including data protection, regulatory compliance, and financial accessibility, with cutting-edge technology including biometric science, cryptography, and machine learning. Our core technology irreversibly transforms identity information to create tokenized identifiers that enable accurate authentication without the need to store or share sensitive data. By retaining the usefulness of biometric-derived data while minimizing the risk, we allow businesses to adopt biometrics and other anti-fraud initiatives while protecting personal information from hacks and leaks.
Trust Stamp’s key sub-markets are identity authentication for the purpose of account opening, access, and fraud detection, the creation of tokenized digital identities to facilitate financial and societal inclusion, and in-community case management software for alternatives to detention and other governmental uses.
As biometric solutions proliferate, so does the need to protect biometric data. Stored biometric images and templates represent a growing and unquantified financial, security, and PR liability and are the subject of governmental, media, and public scrutiny since biometric data cannot be “changed” once they are hacked, as they are directly linked to the user’s physical features and/or behaviors. Privacy concerns around biometric technology have led to close attention from regulators, with multiple jurisdictions placing biometrics in a special or sensitive category of personal data and demanding much stronger safeguards around collection and safekeeping.
To address this unprecedented danger and increased cross-industry need to establish trust quickly and securely in virtual environments, Trust Stamp has developed its Irreversibly Transformed Identity Token, or IT2TM, solutions, which replace biometric templates with a cryptographic hash that can never be rebuilt into the original data and cannot be used to identify the subject outside the environment for which it is designed.
Trust Stamp’s data transformation and comparison technology is vendor and modality-agnostic, allowing organizations including other biometric services providers to benefit from the increased protection, efficiency, and utility of our proprietary tokenization process. With online and offline functionality, Trust Stamp technology is effective in even the most remote locations in the world.
Trust Stamp also offers end-to-end solutions for multi-factor biometric authentication for account access and recovery, KYC/AML compliance, customer onboarding, and more, which allow organizations to approve more genuine users, keep bad actors from accessing systems and services and retain existing users with a superior user experience.
Recent Developments
Private Placement, Entry Into Warrant Exchange Agreement, and Issuance of the Warrants
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On December 21, 2023, the Company entered into a warrant exercise agreement (the “WEA”) with a certain institutional investor, pursuant to which the investor agreed to exercise (the “Exercise”) (i) a portion (106,670) of the warrants issued to the investor on June 5, 2023, which are exercisable for 1,279,700 shares of the Company’s Class A Common Stock, par value $0.01 per share (“Class A Common Stock”) with a current exercise price of $2.30 per share (the “June 2023 Warrants”), (ii) all of the warrants issued to the investor on September 14, 2022, as amended on June 5, 2023, which are exercisable for 120,000 shares of Class A Common Stock, with a current exercise price of $2.30 per share (the “September 2022 Warrants”), and (iii) all of the warrants issued to the investor on April 18, 2023, which are exercisable for 1,573,330 shares of Class A Common Stock, with a current exercise price of $3.30 per share (the “April 2023 Warrants” and collectively with all of the June 2023 Warrants and the September 2022 Warrants, the “Existing Warrants”). In consideration for the immediate exercise of 1,800,000 of the Existing Warrants for cash, the Company agreed to reduce the exercise price of all of the Existing Warrants, including any unexercised portion thereof, to $1.34 per share, which is equal to the most recent closing price of the Company’s Class A Common Stock on The Nasdaq Stock Market prior to the execution of the WEA.
As of December 31, 2023, the institutional investor had submitted an Exercise Notice for 918,000 Existing Warrants and the shares of Class A Common Stock were issued to the warrant holders. The remaining 882,000 Existing Warrants from this exercise are held in abeyance until the Company receives notice from the holders that the remaining shares may be issued in compliance with the beneficial ownership limitation. In addition, in consideration for such Exercise, the investor received new unregistered warrants to purchase up to an aggregate of 3,600,000 shares of Class A Common Stock, equal to 200% of the shares of Class A Common Stock issued in connection with the Exercise, with an exercise price of $1.34 per share (the “New Warrants”) in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”). The New Warrants have substantially the same terms as the June 2023 Warrants. As of the date of this report, the institutional investor had submitted an Exercise Notice for the remaining 882,000 Existing Warrants that were held in abeyance and the shares of Class A Common Stock were issued to the warrant holders.
The Company agreed to file a resale registration statement on Form S-3 with respect to the New Warrants and the shares of Class A Common Stock issuable upon exercise of the New Warrants, which the Company filed on February 16, 2024. The registration statement has not yet been declared effective by the SEC.
The gross proceeds to the Company from the Exercise were $2.41 million, prior to deducting warrant inducement agent fees and estimated offering expenses. The Company intends to use the remainder of the net proceeds for business growth, working capital, and general corporate purposes.
As of the date of this report, the investor has not exercised the New Warrants. All 3,600,000 of the New Warrants remain outstanding as of the date of this report.
Reverse Spit
On February 15, 2023 our Board of Directors approved and, as of February 20, 2023, the holders of a majority of our voting capital stock approved an amendment (the “Certificate of Amendment”) to the Company’s Amended and Restated Certificate of Incorporation and approved to effect a reverse split of our issued and outstanding shares of Class A Common Stock at a ratio of one share for every five shares currently held, rounded up to the nearest whole share – whereby every five (5) outstanding shares of Class A Common Stock was combined and became one (1) share of Class A Common Stock, rounding up to the nearest whole number of shares (the “Reverse Split”). All share and per share amounts have been updated to reflect the Reverse Split in these consolidated financial statements. The Reverse Split was effective for trading on the market opening of Nasdaq on March 23, 2023. The Reverse Stock Split effective March 23, 2023, was ratified by the Company’s stockholders by written consent pursuant to a definitive proxy statement filed with the Securities and Exchange Commission on April 13, 2023. Written consent from the majority of stockholders was received as of May 13, 2023.
Statement of Operations Improvement
Trust Stamp experienced significant improvements, reflecting its commitment to enhancing operational efficiency and driving sustainable growth, in its Basic and diluted net loss per share attributable to T Stamp Inc. with the result of $1.07 for year ended December 31, 2023 compared to $2.55 for year ended December 31, 2022. Despite investing in our sales force, one key driver in the operating loss improvements were reductions in Selling, general, and administrative expenses by $4.05 million, or 32.53%, for the year ended December 31, 2023, when compared to the year ended December 31, 2022. Selling, general and administrative expenses decreased due to cost savings in certain areas within the Company such as
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reductions in salaries, bonus and stock-based compensation, payroll costs, and sales commissions totaling $2.14 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. Other notable reductions in Selling, general and administrative expenses for the year ended December 31, 2023 included a $2.20 million net reduction between corporate travel, management consulting and training, office rent, and costs related to carrying mobile hardware assets as direct result of the Company's recent non-personnel cost cutting initiative. In addition, the Company also saw improvements from an $871 thousand or 48.79% reduction in our Cost of sales when comparing the year ended December 31, 2023 and the year ended December 31, 2022. The result of these reductions were a decrease in Operating Loss to $7.89 million from $12.08 million for year ended December 31, 2022 and Net loss attributable to T Stamp Inc. also decreased by $4.45 million or 36.83% when comparing the year ended December 31, 2023 and the year ended December 31, 2022.
Key Business Measures
In addition to the measures presented in our consolidated financial statements, we use the following key non-GAAP business measures 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) other expense, (2) other income, (3) gain on sale of mobile hardware, (4) interest expense, (5) interest income, (6) stock-based compensation, (7) change in fair value of warrant liabilities (8) impairment of assets, (9) non-cash expenses for in-kind services, (10) depreciation, and (11) 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.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments.
•Adjusted EBITDA does not reflect changes in, or cash requirements for our working capital needs.
•Although Depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.
•Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations.
Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement to our U.S. GAAP results.
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Reconciliation of Net Loss to Adjusted EBITDA
For the year ended December 31,
Less: Gain on sale of mobile hardware (216,189) —
Add: Change in fair value of warrant liability (5,033) (113,125)
Add: Non-cash expenses for in-kind services 18,547 111,720
Adjusted EBITDA loss (non-GAAP) for the year ended December 31, 2023, decreased by 26.17%, to $6.50 million from $8.81 million for the year ended December 31, 2022. The overall decrease in Adjusted EBITDA loss (non-GAAP) was driven primarily by reductions in Selling, general, and administrative expenses (as a result of various operating cost reductions initiated in 2022) including the $1.64 million reduction of stock-based compensation for the year ended December 31, 2023 when compared to the year ended December 31, 2022. In addition, the IGS Contract resulted in $2.51 million in Net revenue for the provision of software during the year ended December 31, 2023, and the release from future contractual obligations for maintenance and upgrades as a result of the termination of the IGS Contract discussed in Liquidity and Capital Resources subsection below. See “Results of Operations” below for further discussion on the drivers behind the decrease in stock-based compensation during the year ended December 31, 2023.
Components of Results of Operations
Net revenue
We derive our revenue primarily from professional services though our business model is transitioning to focus on recurring Software-as-a-Service (SaaS) revenue.
In addition to revenue from Mastercard and our S&P 500 bank customer, $2.51 million was derived from a contract with IGS during the year ended December 31, 2023. The Company also continued to expand the Orchestration Layer platform, which is being utilized by several customers including FIS’ new global identity authentication system, which is a SaaS platform that includes the Company’s proprietary tokenization technology, and facilitates no-code and low-code implementations, making adoption faster and even more cost-effective for a broader range of potential customers. The Company expects this platform to accelerate its evolution, from being exclusively a custom solutions provider, to also offering a modular and highly scalable SaaS model with low-code implementation.
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.
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We expect that cost of services provided will continue to decrease in absolute dollars until the transition to primarily SaaS revenue is complete. After the transition is complete, we expect cost of services to increase in absolute dollars as the volume of usage revenue increases, but the margin will continue to improve until they stabilize over time.
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.
We expect that the sales and marketing expenses within the SG&A 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 and patent registrations which will be used for future productization.
Interest income (expense)
Interest income (expense) consists primarily of interest expense accrued on a promissory note payable. Additionally, the Company earned interest income in the form of interest on employee stock loans.
Other income
Other income is mainly driven by miscellaneous income earned that is unrelated to the main focus of the Company’s business including the gain or loss on sale of assets.
Other expense
Other expense is mainly driven by miscellaneous expenses unrelated to the main focus of the Company’s business. Prior to 2023, Other expense was mainly driven by certain exchange rate gains and losses associated with converting the foreign currency activity to the Company’s reporting currency, United States dollars ("USD"). After management concluded there is no intention to settle intercompany accounts in the foreseeable future, beginning June 30, 2022, future fluctuations in foreign currencies between the Company and its subsidiaries are recorded to Accumulated other comprehensive income on the balance sheet instead of Other expense.
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Results of Operations
The following table summarizes our consolidated statements of operations for the years ended December 31, 2023 and 2022:
For the years ended December 31,
Operating Expenses:
Non-Operating Income (Expense):
Change in fair value of warrant liability 5,033 113,125
Impairment of digital assets — (27,934)
Net loss attributable to non-controlling interest — —
Comparison of the Years Ended December 31, 2023 and 2022
Net revenue
For the years ended December 31,
During the year ended December 31, 2023, Net revenue decreased to $4.56 million, or 15.32% from Net revenue of $5.39 million for the year ended December 31, 2022. During the year ended December 31, 2023, the $4.56 million in Net revenue consisted of $2.51 million from IGS, $810 thousand from a S&P 500 bank, $772 thousand from Mastercard, and various other customers for the remaining $468 thousand. The majority of the decrease in the comparative periods relates to the September 23, 2021 U.S. Immigration and Customs Enforcement contract (“ICE Contract”) which produced $3.29 million in Net revenue during the year ended December 31, 2022 and was subsequently terminated during fiscal year 2022.
The decrease from the ICE contract termination is offset by the increase in the Net revenue from the IGS Contract which resulted in $2.51 million in Net revenue for the provision of software during the year ended December 31, 2023, and the release from future contractual obligations for maintenance and upgrades as a result of the termination of the IGS Contract discussed in Liquidity and Capital Resources subsection below. Despite this termination, the Company is optimistic about
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future opportunities in the government sector, has entered into a teaming agreement to provide future services, and retains the capability to provide future services for maintenance, upgrades, and deployments of the product for additional fees.
During the year ended December 31, 2023, the Company generated $310 thousand total revenue from customers using the Orchestration Layer including implementing the Orchestration Layer platform for 34 new enterprise customers through FIS on the Software-as-a-Service (SaaS) platform. In comparison, during the year ended December 31, 2022, the Company generated $104 thousand total revenue from Orchestration Layer customers. Since its launch in the third quarter of 2022, there have been 43 enterprise customers on the Orchestration Layer platform, including 40 financial institutions, as of December 31, 2023. Additionally, revenue from the Orchestration Layer's flagship enterprise customer grew 197% between the comparative periods as a result of transitioning and launching the customer on the Orchestration Layer platform. Orchestration Layer's flagship enterprise customer is already in full production and generating monthly recurring revenue with gross margins in excess of 83.12%. Finally, the Company's S&P 500 bank customer began its transition to an augmented version of the SaaS platform during the year ended December 31, 2023.
The Orchestration Layer is designed to be a one-stop-shop for Trust Stamp services and provides for easy integration to our products; chargeable on a per-use basis and is accelerating the Company’s evolution from being exclusively a custom solutions provider to also offering a modular and highly scalable SaaS model with low-code implementation.
Cost of services
For the years ended December 31,
Cost of services (“COS”) decreased by $871 thousand or 48.79% for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease during this period was primarily driven by the costs related to servicing requirements from the ICE Contract. ICE Contract-related COS for the year ended December 31, 2022, were $802 thousand, including vendor and other miscellaneous costs as well as direct labor costs, versus no ICE Contract-related COS during the year ended December 31, 2023 (as a result of the ICE Contract being terminated in 2022).
After adjusting the comparative periods’ COS for ICE Contract related costs, COS reduced by $69 thousand despite onboarding 34 new enterprise customers during the year ended December 31, 2023, and is a result of the the low marginal costs that are inherent in SaaS platforms such as the Orchestration Layer.
Research and development
For the years ended December 31,
Research and development (“R&D”) expenses decreased by $124 thousand, or 5.00% for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease in R&D expense during the year ended December 31, 2023 was primarily driven by a decrease in outsourced software development during the year ended December 31, 2023 as the Company continued to transition this work internally. Other cost savings during the year ended December 31, 2023 were also realized due to the termination of employees hired for the ICE contract, closure of the United Kingdom office, as well as, a decrease in stock-based compensation expense.
Additionally, the Company recognized an impairment loss on Capitalized internal-use software of $19 thousand during the year ended December 31, 2023 that offset the increase in R&D. There was no impairment loss on Capitalized internal-use software for the year ended December 31, 2022. Capitalized internal-use software are considered long-lived assets under applicable accounting guidance. 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.
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Selling, general, and administrative
For the years ended December 31,
Selling, general, and administrative expense (“SG&A”) decreased by $4.05 million, or 32.53%, for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease in SG&A expense was driven mostly by the reductions in personnel overhead related expense due to the 2022 cost cutting initiatives executed by the Company. While personnel overhead decreased during the year ended December 31, 2023, the headcount increased due to reinvestment of cost cutting savings into bolstering our sales resources and bringing in-house technical positions that were previously outsourced. Headcount increased by 3.53%, from 85 FTE for the year ended December 31, 2022, compared to 88 FTE for the year ended December 31, 2023. In effect, salaries, bonus and stock-based compensation, payroll costs, and sales commissions reduced by $2.14 million for the year ended December 31, 2023, compared to the year ended December 31, 2022.
Other notable reductions in SG&A for the year ended December 31, 2023 included a $2.20 million net reduction between corporate travel, management consulting and training, office rent, and costs related to carrying mobile hardware assets as direct result of the Company's recent non-personnel cost cutting initiative.
Depreciation and amortization
For the years ended December 31,
Depreciation and amortization (“D&A”) increased by $29 thousand, or 3.82% for the year ended December 31, 2023, compared to the year ended December 31, 2022. The primary increase in D&A expense related to the $48 thousand increase in amortization of patents between the comparative periods. This increase is the result of new pending patent applications and issued patents with the United States Patent and Trademark Office. During the year ended December 31, 2023, the Company added 4 issued patents, 5 new patent applications, 1 trademark registration, and 2 new trademark applications including the patent application for Tap-In BandTM. The Tap-In BandTM is a wrist-worn, tamper resistant, hypoallergenic near-field communication band that facilitates discrete check-in by, and communication with, participants in community based supervision programs. This technology and associated biometric processes utilize Trust Stamp’s patented IT2 identity tokenization processes that allow users to biometrically authenticate without the need to store biometric images or templates.
Additionally, Capitalized internal-use software amortization increased by $40 thousand between the comparative periods. While the amounts of Capitalized internal-use software vary from period to period, we continue to see a trend of increasing software amortization which is driven by the growth in software capitalization over the prior periods. Overall, this is a further result of newly issued patents continuing to produce new internal-use software, or microservices, that have reached technical feasibility at which point the Company begins to capitalize the related costs.
These increases were partially offset by a $60 thousand decrease in D&A expense related to the depreciation of mobile hardware assets that were sold during the year ended December 31, 2023.
Operating loss
For the years ended December 31,
The Company’s Operating loss decreased by $4.19 million or 34.68% for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease in Operating loss was mostly related to the decrease of $5.01 million or 28.71% reduction in operating expenses as a result of various cost cutting measures initiated in fiscal years 2022 and 2023 that outpaced the reduction in Net revenue, thereby producing desirable margin growth and greater company efficiency.
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Interest expense, net
For the years ended December 31,
Interest expense, net increased by $64 thousand, or 724.22% for the year ended December 31, 2023, compared to the year ended December 31, 2022. Interest earned decreased by $7 thousand to $623 for the year ended December 31, 2023 from $8 thousand for the year ended December 31, 2022. Interest expense increased by $57 thousand to $74 thousand for the year ended December 31, 2023 from $17 thousand for the year ended December 31, 2022. The increase in interest expense is primarily due to an increase of $39 thousand in the Malta loan interest rate from 2.5% for the year ended December 31, 2022 to 4.5% for the year ended December 31, 2023. Additionally, the Company recorded $34 thousand in interest expense during the year ended December 31, 2023 for interest accrued on Malta's tax obligations.
Change in fair value of warrant liability
For the years ended December 31,
The Company recognized a gain in Change in fair value of warrant liability during the year ended December 31, 2023 of $5 thousand compared to a gain of $113 thousand during the year ended December 31, 2022. This change is based on the fair value assessment and adjustment for one warrant liability as described in Note 3 to the financial statements provided under Item 1 of this report.
Impairment of digital assets
For the years ended December 31,
The Company recognized an impairment on digital assets during the year ended December 31, 2022, of $28 thousand. Digital assets are considered indefinite-lived Intangible assets, net under applicable accounting rules. Accordingly, any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition requires recognition of impairment.
Other income
For the years ended December 31,
Other income increased by $260 thousand for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase was primarily due to a $213 thousand gain on the sale of the mobile hardware assets. Additionally, during the year ended December 31, 2023 there was an increase of $25 thousand related to services received from participants in a startup accelerator program conducted by the Company in Malta with the objective of strengthening the innovation platform and startup ecosystem in Malta.
Other expense
For the years ended December 31,
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Other expense decreased by $115 thousand for the year ended December 31, 2023, compared to the year ended December 31, 2022. The Company incurred $95 thousand in unrealized loss on foreign currency translation expense for the year ended December 31, 2022, for intercompany transactions between the parent company, T Stamp Inc., and its subsidiaries, Trust Stamp Malta Limited, Biometric Innovations Limited, and Trust Stamp Rwanda Limited with currencies denominated in United States Dollars, European Union Euros, British Pound Sterling, and Rwandan Franc, respectively. After management concluded there is no intention to settle intercompany accounts in the foreseeable future, beginning in June 30, 2022, future fluctuations in foreign currencies between the Company and its subsidiaries are recorded to Accumulated other comprehensive income on the balance sheet instead of Other expense.
Liquidity and Capital Resources
As of December 31, 2023, the Company had approximately $3.14 million cash in its banking accounts.
The increase of $1.89 million in Cash and cash equivalents from December 31, 2022 to December 31, 2023 was a result of the net cash inflow which consisted of $7.85 million net operating cash outflows, $402 thousand net investing cash outflows, and $10.21 million net financing cash inflows. Additionally, there was an $73 thousand cash outflow for a foreign currency transaction adjustment. See the “Cash Flows” subsection below for more details on cash activities during the year ended December 31, 2023.
Total Current Assets for the comparative periods increased by 63.44% or $1.82 million from $2.87 million as of December 31, 2022, to $4.70 million as of December 31, 2023. The increase in current assets was primarily driven by the increase in Cash and cash equivalents of $1.89 million (discussed above). Prepaid expenses and other current assets increased by $247 thousand predominantly due to the timing of invoice billing to participants of the startup accelerator program conducted by the Company in the Republic of Malta. Additionally, there was a $322 thousand decrease in Accounts receivable that offset the increase, mostly due to decreased billing and a slight delay in the collection of invoice receipts by several enterprise customers billed as of December 31, 2022.
Total Current Liabilities decreased by 38.97% or $1.73 million from $4.45 million as of December 31, 2022 compared to $2.71 million as of December 31, 2023. This decrease is primarily attributed to the $1.80 million decrease in Deferred revenue. Deferred revenue decreased primarily due to the recognition of $2.51 million in non-refundable revenue advances for software provisioned by the Company for IGS of which $1.76 million was in Deferred revenue as of December 31, 2022. Upon termination of the MSA, IGS waived their option to make additional payments in exchange for future maintenance and upgrades. As a result of the termination, Trust Stamp has no further performance obligations or contingencies related to the MSA. Additionally, there were decreases in Other current liabilities, including $191 thousand Related party payables due to the timing of payables and $97 thousand in Short-term operating lease liabilities due to the termination of two Malta office leases in 2023. The decreases in Total Current Liabilities were offset by the increases of $287 thousand in Accounts payable and $44 thousand in Accrued expenses due to timing of payables as well as $43 thousand in Short-term financial liabilities due to the sale of mobile hardware assets which triggered the total financial liability balance becoming current.
In effect, the Company’s current ratio (i.e., the ratio of the Company’s Total Current Assets as a multiple of Total Current Liabilities or the Company’s ability to service its near-term liabilities with its near-to-cash assets) increased from 0.65 as of December 31, 2022 to 1.73 representing a 166.15% increase during the year ended December 31, 2023. This is, in part, a result of the net cash inflow from financing activities, offset by the cash outflows from investing, and operating activities, discussed in further detail below.
Effective September 3, 2019, the Company entered into a software license agreement with a customer pursuant to which the Company received total fees of $150 thousand in 2020, $200 thousand in 2021, and $250 thousand in 2022. On December 31, 2022, the software license agreement was amended. The Company received fees of $300 thousand in 2023 which will continue to rise by 15% in each subsequent year after 2023 with the annual minimum fee capped at $1.00 million. The cap in the annual minimum fee does not restrict the Company from earning additional fees for transactions that exceed the annual minimum transaction volume.
On September 15, 2022, the Company entered into a Master Services Agreement (“the MSA”) with Innovative Government Solutions (“IGS”) under which the Company and IGS agreed to jointly offer services and IGS was granted a 12-year (renewable) license (“the license”) to resell the Company’s technology subject to payment by IGS of agreed revenue advances and end user license fees. On execution of the MSA, IGS agreed to pay $1.50 million to the Company as a non-refundable revenue advance, an additional $1.50 million non-refundable revenue advance on the first anniversary of
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the MSA, and $1.00 million on each of the next two anniversaries of the MSA as additional non-refundable revenue advances. IGS had the right to terminate the MSA for convenience before the additional non-refundable revenue advances become due in which case the unpaid additional non-refundable revenue advances will not be payable and the license will terminate. On September 14, 2023, Trust Stamp received notification from IGS that it was terminating the MSA effective September 15, 2023. IGS paid Trust Stamp a total of $2.51 million in non-refundable revenue advances for software provisioned prior to the termination. Upon terminating the MSA, IGS waived their option to make additional payments in exchange for future maintenance and upgrades. Trust Stamp has no remaining performance obligations or contingencies related to the MSA. During the year ended December 31, 2023, Trust Stamp recognized the $2.51 million in IGS non-refundable revenue advances that were previously recorded to Deferred revenue.
During the year ended December 31, 2023, the Company received a provisional patent for the Tap-In BandTM patent application, which is a wrist-worn, tamper resistant, hypoallergenic near-field communication band that facilitates discrete check-in by, and communication with, participants in community based supervision programs. This technology and associated biometric processes utilize Trust Stamp’s patented IT2 identity tokenization processes that allow users to biometrically authenticate without the need to store biometric images or templates. The Company is optimistic about the tremendous market opportunity for the Tap-In BandTM technology, specifically in the government sector.
Going Concern
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 Net loss in the year ended December 31, 2023 of $7.64 million, Net operating cash outflows of $7.85 million for the same period, and an Accumulated deficit of $50.85 million as of December 31, 2023.
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 plans to generate revenue and raise capital as needed to satisfy its capital needs. While the negotiation of significant additional revenue is well advanced, it has not reached a stage that allows it to be factored into a going concern evaluation. In addition, although the Company has previously been successful in raising capital as needed and has already made plans to do so as well as restructuring expenses to meet the Company’s cash needs, no assurance can be given that the Company will be successful in its capital raising efforts. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022:
For the years ended December 31,
Net cash flows from investing activities $ (401,680) $ (998,190)
Operating Activities
Net cash flows from operating activities increased by 23.91% from $6.34 million during the year ended December 31, 2022, compared to $7.85 million during the year ended December 31, 2023. Of the $7.64 million net loss for the year ended December 31, 2023, there were various cash and non-cash adjustments that were added back to the Net loss to arrive at $7.85 million cash used for operating activities for the year ended December 31, 2023.
Those adjustments included the $1.80 million reduction in Deferred revenue mainly due to the recognition of $2.51 million in non-refundable revenue advances for software provisioned by the Company for IGS, this was partially offset by cash received and recorded to Deferred revenue from various customers. Cash and noncash reductions also included $216 thousand for the Gain on the sale of property and equipment resulting from the sale of mobile hardware assets, $244 thousand increase in Prepaid expenses and other current assets mainly due to the invoice billing to participants of the
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startup accelerator program conducted by the Company in the Republic of Malta, and $191 thousand for the decrease in Related party payables as a result of the reduction in reliance on outsourced software development.
The reductions were offset by adding back certain cash and noncash adjustments including $790 thousand for non-cash Depreciation and amortization, $763 thousand related to stock-based compensation, $281 thousand from the timing of accruals, and $322 thousand for cash received on Accounts receivable.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2023 was $402 thousand, compared to net cash of $998 thousand used in the year ended December 31, 2022. Cash used in investing activities during the year ended December 31, 2023 related primarily to new and continued investments in technologies that we intend to capitalize and monetize over time. In addition, the Company continued to prioritize intellectual property, which produced five (5) new pending patent applications and four (4) issued patents with the United States Patent and Trademark Office during the year ended December 31, 2023. The cash used during the year ended December 31, 2023 was offset by the $377 thousand decrease in Property and equipment, net related to the sale of the mobile hardware assets.
Financing Activities
During the year ended December 31, 2023, Net cash flows from financing activities was $10.21 million, compared to Net cash flows from financing activities of $5.10 million for the year ended December 31, 2022. The Company raised $4.78 million and $2.69 million in net proceeds, during the year ended December 31, 2023, from two separate securities purchase agreements ("SPA") with an institutional investor for the issuance of Class A Common Stock, pre-funded warrants, and common stock warrants. The same institutional investor exercised 270,000 warrants to purchase shares of Class A Common Stock of the Company for total proceeds of $621,000. Additionally, the institutional investor exercised 1,800,000 common stock warrants from previous raises for the price of $1.34 per warrant resulting in $2.23 million in net proceeds from the exercise. See Note 3 to the financial statements provided under Item 1 of this report for more details. In addition, during the year ended December 31, 2023, there was a $79 thousand tax withholding adjustment for net issuances on employee equity compensation and $30 thousand for payments on financial liabilities.
During the year ended December 31, 2022, net cash provided by financing activities was $5.10 million. The Company received $3.33 million from a warrant exercise by SCV and REach® Ventures (a related party) in December 2021, $95 thousand from the exercise of options, $1.42 million from the sale of Class A Common Stock and warrants exercisable into Class A Common Stock in a private investment in public equity agreement with Armistice Capital Master Fund Ltd., and $246 thousand in units sold and warrants exercised, net of raise costs, in connection to the Company’s 2021 raises under Regulation CF, Regulation D, and Regulation S in preparation for our Nasdaq listing. The receipts were offset by $90 thousand for principal payments made for the financial liability.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated 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 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
Capitalized Internal-Use Software, Net is a combination of costs that are related to software developed, modified, or acquired solely to meet Trust Stamp's internal requirements if there are no substantive plans to market such software at the time of development or acquisition. Costs related to the development of software-as-a-service ("SaaS") based solutions are also capitalized. The Company capitalizes eligible costs for the development of Capitalized Internal-Use Software and SaaS solutions that are incurred after the preliminary project stage and throughout the development stage. These costs consist of personnel costs (salaries, related benefits, and stock-based compensation) and certain third-party costs incurred during the application development stage. Furthermore, costs incurred to upgrade and enhance software that results in
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additional functionality are also capitalized. However, costs incurred during the preliminary project stage, the post-implementation operational stage, and routine maintenance are expensed as incurred.
The estimated useful life of capitalized costs is evaluated for each specific project as actual economic lives may differ from estimated useful lives. Trust Stamp periodically reviews the estimated useful life of its Capitalized Internal-Use Software, Net. Such evaluations may result in an adjustment to its estimated useful life which could impact amortization expense in future periods. Additionally, the Company assesses Capitalized Internal-Use Software, Net to determine if the capitalized costs are no longer recoverable or obsolete. If the Company determines that capitalized amounts are no longer in service or are no longer recoverable, it records an expense to dispose of the impaired balances.
Changes in the estimated useful life could result in an acceleration or deceleration of amortization expense, which may have a significant impact on our financial condition and operating results. Furthermore, if certain capitalized costs are determined to be unrecoverable or obsolete, it could lead to impairments that would require us to recognize non-cash expenses in our consolidated statements of operations. Such impairments may have a material effect on our financial condition and operating results.
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
T STAMP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-9
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of T Stamp Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of T Stamp Inc. (the “Company”) as of December 31, 2023and 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 (United States) ("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 audits 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.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2022.
Marlton, New Jersey
April 1, 2024
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T STAMP INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
ASSETS
Current Assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Long-term financial liabilities — 88,760
Commitments, Note 11
Stockholders’ Equity:
Stockholders’ notes receivable — (18,547)
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 5,033 113,125
Impairment of digital assets — (27,934)
Net loss attributable to non-controlling interest — —
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 COMPREHENSIVE LOSS
For the years ended December 31,
Other Comprehensive Income (Loss):
Foreign currency translation adjustments (97,582) 53,352
Total Other Comprehensive Income (Loss) (97,582) 53,352
Comprehensive loss attributable to non-controlling interest — —
Comprehensive loss attributable to T Stamp Inc. $ (7,735,224) $ (12,038,188)
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 STOCKHOLDERS’ EQUITY
Shares Amount Shares Amount
Issuance of common stock warrants — — 667,290 — — — — — — 667,290
Currency translation adjustment — — — — — — 53,352 — — 53,352
Issuance of common stock warrants — — 3,915,917 — — — — (3,915,917) — —
Reverse stock split rounding 4,759 48 (48) — — — — — — —
Currency translation adjustment — — — — — — (97,582) — — (97,582)
Net loss attributable to T Stamp Inc. — — — — — — — (7,637,642) — (7,637,642)
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 CASH FLOWS
For the years ended December 31,
Cash flows from operating activities:
Net loss attributable to non-controlling interest — —
Adjustments to reconcile net loss to cash flows used in operating activities:
Change in fair value of warrant liability (5,033) (113,125)
Repayment of shareholder loan through in-kind services 18,547 111,720
Gain on sale of property and equipment (216,189) —
Non-cash write off of mobile hardware (15,775) —
Loss on retirement of equipment 17,930 —
Changes in assets and liabilities:
Customer deposit liabilities — (280,108)
Cash flows from investing activities:
Proceeds from sale of property and equipment 377,360 —
Capitalized internally developed software costs (630,111) (776,055)
Acquisition of Pixelpin intangible asset — 13,362
Purchases of property and equipment (4,710) (30,842)
Purchase of digital assets — (30,000)
Cash flows from financing activities:
Proceeds from exercise of options to common stock 2,000 95,116
Forfeited common stock shares to satisfy taxes (78,901) —
Proceeds from issuance of common stock warrants — 667,290
Proceeds from loan from Maltese government — 61,361
Principal payments on financial liabilities (29,715) (89,530)
Effect of foreign currency translation on cash (72,931) 13,181
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T STAMP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 580 $ 8
Supplemental disclosure of non-cash activities:
Prepaid rent expense reclassified upon termination of leases $ 7,674 $ —
Adjustment to prepaid rent upon commencement of new lease $ 5,462 $ —
Property and equipment acquired under financial liability $ — $ 297,150
Operating lease liabilities established upon adoption of ASC 842 $ — $ 302,573
Prepaid rent expense reclassified upon adoption of ASC 842 $ — $ 42,756
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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T STAMP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies And Going Concern
Description of Business — T Stamp Inc. was incorporated on April 11, 2016 in the State of Delaware. T Stamp Inc. and its subsidiaries (“Trust Stamp”, “we”, “us”, “our” or the “Company”) develops and markets identity authentication software solutions for enterprise and government partners and peer-to-peer markets.
Trust Stamp develops proprietary artificial intelligence-powered solutions, researching and leveraging machine learning, artificial intelligence, biometric science, cryptography, and data mining, to deliver insightful identity and trust predictions that identify and defend against fraudulent identity attacks, protect sensitive user information, and extend the reach of digital services through global accessibility. We utilize the power and agility of technologies such as GPU processing, edge-computing, neural networks, and large language models to process and protect data faster and more effectively than has ever previously been possible in order to deliver results at a disruptively low cost for usage across multiple industries, including:
•Banking/FinTech
•KYC/AML Compliance
•Humanitarian and Development Services
•Government and Law Enforcement, including Alternative to Detention programs
•Cryptocurrency and Digital Assets
•Biometrically Secured Email and Digital Communications
•P2P Transactions, Social Media, and Sharing Economy
•Real Estate, Travel, and Healthcare
Reverse Split — On February 15, 2023 our Board of Directors approved and, as of February 20, 2023, the holders of a majority of our voting capital stock approved an amendment (the “Certificate of Amendment”) to the Company’s Amended and Restated Certificate of Incorporation and approved to effect a reverse split of our issued and outstanding shares of Class A Common Stock at a ratio of one share for every five shares currently held, rounded up to the nearest whole share – whereby every five (5) outstanding shares of Class A Common Stock was combined and became one (1) share of Class A Common Stock, rounding up to the nearest whole number of shares (the “Reverse Split”). All share and per share amounts have been updated to reflect the Reverse Split in these consolidated financial statements. The Reverse Split was effective for trading on the market opening of Nasdaq on March 23, 2023. The Reverse Stock Split effective March 23, 2023, was ratified by the Company’s stockholders by written consent pursuant to a definitive proxy statement filed with the Securities and Exchange Commission on April 13, 2023. Written consent from the majority of stockholders was received as of May 13, 2023.
Amended and Restated Certificate of Incorporation —On July 6, 2023, the Company received confirmation of the acceptance of its Third Amended and Restated Certificate of Incorporation (the "Third Restated Certificate") from the Secretary of State of Delaware. The Third Restated Certificate was approved by the Company’s stockholders by written consent pursuant to a definitive proxy statement filed with the Securities and Exchange Commission on April 13, 2023. Written consent from the majority of stockholders was received as of May 13, 2023. The Third Restated Certificate maintained the 50,000,000 authorized shares of Common Stock and eliminated the authorized Preferred Stock. The Third Restated Certificate also created a classified Board of Directors of the Company with three classes of directors who will stand for election in staggered years.
Going Concern — 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 Net loss in the year ended December 31, 2023 of $7.64 million, negative Net operating cash outflows of $7.85 million for the same period, working capital of $1.98 million and an Accumulated deficit of $50.85 million as of December 31, 2023.
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
F-9
evaluated these conditions and plans to generate revenue and raise capital as needed to satisfy the Company’s capital needs. While the negotiation of significant additional revenue is well advanced, it has not reached a stage that allows it to be factored into a going concern evaluation. In addition, although the Company has previously been successful in raising capital as needed and has already made plans to do so as well as restructuring expenses to meet the Company’s cash needs, no assurance can be given that the Company will be successful in its capital raising efforts. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.
Basis of Presentation—The accompanying consolidated financial statements have been prepared in conformity with US Generally Accepted Accounting Principles (“US GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Basis of Consolidation— The accompanying consolidated financial statements reflect the activity of the Company and its subsidiaries, Trusted Mail Inc. (“Trusted Mail”), Finnovation LLC (“Finnovation”), Trust Stamp Malta Limited (“Trust Stamp Malta”), AIID Payments Limited, Biometric Innovations Limited (“Biometrics”), Trust Stamp Rwanda Limited, Metapresence Limited, and Trust Stamp Denmark ApS. All significant intercompany transactions and accounts have been eliminated.
On February 28, 2023, the Company received the Certificate of Termination from the State of Georgia, which represents the completion of administratively dissolving T Avatar LLC. As there were no operations established under the entity, there is a limited impact to Trust Stamp. The dissolution of T Avatar LLC was effective February 28, 2023.
On June 2, 2023, the Company received the termination resolution from the Polish National Court Register, which represents the completion of administratively dissolving Sunflower AI Technologies (“SAIT”). As there were no operations established under the entity, there is a limited impact to Trust Stamp. The dissolution of SAIT was effective May 10, 2023.
Further, we continue to consolidate Tstamp Incentive Holdings (“TSIH”) which we consider to be a variable interest entity.
Variable Interest Entity — On April 9, 2019, management created a new entity, TSIH. Furthermore, on April 25, 2019, the Company issued 320,513 shares of Class A Common Stock to TSIH, for the purpose of providing a pool of shares of Class A Common Stock of the Company that the Company’s Board of Directors (the “Board”) could use for employee stock awards and were recorded initially as Treasury stock. Since establishing TSIH, 264,000 shares were transferred to various employees as a stock award that were earned and outstanding. On February 15, 2023, Trust Stamp issued 206,033 shares of Class A Common Stock to TSIH to be used to satisfy vested employee stock awards. As of December 31, 2023, TSIH held 54,734 Treasury stock earmarked for future employee Restricted Stock Unit ("RSU") bonuses. As of the date of this report, no shares of Class A Common Stock are held by TSIH as all shares have been issued pursuant to employee Restricted Stock Units.
The Company does not own any of the shares of Class A Common Stock of the Company held by TSIH. The Company considers this entity to be a variable interest entity (“VIE”) because it is thinly capitalized and holds no cash. Because the Company does not own shares in TSIH, management believes that this gives the Company a variable interest. Further, management of the Company also acts as management of TSIH and is the decision-maker as management grants shares held by TSIH to employees of the Company. As this VIE owns only shares in the Company and no other liabilities or assets, the Company is the primary beneficiary of TSIH and will consolidate the VIE.
Use of Estimates—The preparation of the consolidated financial statements in conformity with 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, the Company evaluates their estimates that include, but are not limited to, measuring satisfaction of a performance obligation over time, 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 recoverability of Goodwill, stock-based compensation, impairment of long-lived assets, the valuation of deferred tax assets and uncertain tax positions, and warrant liabilities. We base our estimates on assumptions, both historical and forward-looking trends, and various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
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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 and 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 thousand 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, 2023 and 2022, the Company had $2.62 million and $71 thousand in U.S. bank accounts, 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.
For Accounts receivable, we are exposed to credit risk in the event of nonpayment by customers to the extent the amounts are recorded in the consolidated balance sheets. We extend different levels of credit and maintain reserves for potential credit losses based upon the expected collectability of Accounts receivable. We manage credit risk related to our customers by performing periodic evaluations of credit worthiness and applying other credit risk monitoring procedures.
Three customers represented 91.11% or 53.55%, 30.43%, and 7.13% of the balance of total Accounts receivable as of December 31, 2023 and three customers represented 95.37% or 36.90%, 32.69%, and 25.78% of the balance of total Accounts receivable as of December 31, 2022. 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, 2023 and 2022, the Company had not experienced any significant losses on its Accounts receivable.
During the year ended December 31, 2023, the Company sold to primarily three customers which made up approximately 89.75% of total Net revenue, and consisted of 55.04%, 17.77%, and 16.94% from IGS, an S&P 500 Bank, and Mastercard, respectively.
Additionally, during the year ended December 31, 2022, the Company sold to primarily three customers which made up approximately 93.60% of total Net revenue, and consisted of 61.01%, 18.36%, and 14.23% from ICE, an S&P 500 Bank, and Mastercard.
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 (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 as cash equivalents.
Accounts Receivable and Allowance for Credit Losses — Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses, if any. The Company’s trade receivables primarily arise from the sale of our products to customers through contracts for software licenses and subscriptions, software usage, web hosting fees, and software development with payment terms of 60 days. The Company evaluates the credit risk of a customer when extending credit based on a combination of various financial and qualitative factors that may affect the customers’ ability to pay. These factors include the customers’ financial condition and past payment experience.
The Company maintains an allowance for credit losses, which represents an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The Company measures expected credit losses on its trade receivables on a customer basis. The estimate of
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expected credit losses considers any historical losses, delinquency trends, collection experience, and/or economic risk where appropriate. Additionally, management develops a specific allowance for trade receivables known to have a high risk of expected future credit loss.
The Company has historically experienced immaterial write-offs given the nature of the customers and contracts. As of December 31, 2023, the Company had gross receivables (including unbilled receivables) of $694 thousand and an allowance for credit losses of $8 thousand. As of December 31, 2022, the Company had gross receivables of $1.01 million and no allowance for credit losses.
As of December 31, 2023 and 2022, Accounts receivable includes unbilled receivables of $143 thousand and $109 thousand, respectively.
Property and Equipment, Net — Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed when incurred, whereas additions and major improvements are capitalized. Upon sale or retirement of assets, the cost and related accumulated depreciation are derecognized from the consolidated balance sheet and any resulting gain or loss is recorded in the consolidated statements of operations in the period realized.
Capitalized Internal-Use Software, Net—Capitalized Internal-Use Software, Net is a combination of costs related to software developed, modified, or acquired solely to meet Trust Stamp's internal requirements, with no substantive plans to market such software at the time of development or acquisition are capitalized, and costs related to the development of software-as-a-service ("SaaS") based solutions. The Company capitalizes eligible costs to develop Capitalized Internal-Use Software and SaaS solutions that are incurred subsequent to the preliminary project stage throughout the development stage. These costs consist of personnel costs (including salaries, related benefits, and stock-based compensation) and certain third-party costs that are incurred during the application development stage. We also capitalize the costs incurred to upgrade and enhance that result in additional functionality. Costs incurred during the preliminary project stage, the post-implementation operational stage, and for maintenance are expensed as incurred. Maintenance costs are expensed as incurred. The estimated useful life of costs capitalized is evaluated for each specific project that is generally five years. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore changes in amortization expense in future periods.
Accounting for Impairment of Long-Lived Assets — Long-lived assets with finite lives include Property and equipment, net, Capitalized internal-use software, Operating lease right-of-use assets, and Intangible assets, net subject to amortization. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group 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.
As of December 31, 2023, the Company determined that $19 thousand of Capitalized internal-use software and $12 thousand of Intangible assets was impaired. The impaired Capitalized internal-use software was expensed to Research and development during the year ended December 31, 2023.. As of December 31, 2022, the Company determined that no long-lived assets with finite lives were impaired.
Goodwill— Goodwill is accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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, net, is recorded as Goodwill. Goodwill is tested for impairment at the reporting unit level at least quarterly or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing Goodwill for impairment, the Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In the qualitative assessment, the Company considers factors including economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Should the Company conclude that it is more likely than not that the recorded Goodwill amounts have been impaired, the Company would perform the impairment test. Goodwill impairment exists when a reporting unit’s
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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, 2023 and 2022.
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 and cash equivalents, Accounts receivable, Related party receivables, Prepaid expenses and other current assets, Other assets, Accounts payable, Related party payables, Accrued expenses, Deferred revenue, Customer deposit liabilities, and Notes payable approximate their carrying values. The fair values of warrant liabilities issued in connection with equity or debt issuance are determined using the Black-Scholes valuation model, a “Level 3” fair value measurement, based on the estimated fair value of the underlying common stock, volatility based on the historical volatility data of similar companies, considering the industry, products and market capitalization of such other entities, the expected life based on the remaining contractual term of the conversion option and warrant liabilities and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrant liability’s contractual life. The Company accounts for its financial assets and liabilities at fair value regularly. The Company evaluates the fair value of its non-financial assets and liabilities on a nonrecurring basis.
Revenue Recognition—The Company derives its revenue primarily from professional services. Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, the Company includes an estimate of the amount it expects to receive or the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company determines the amount of revenue to be recognized through the application of the following steps:
•Identification of the contract, or contracts with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when or as the Company satisfies the performance obligations.
At contract inception, the Company will assess the services agreed upon within each contract and assess whether each service is distinct and determine those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. In general, each contract with a customer consists of a single performance obligation to perform services in which revenue is recognized when the service has been delivered.
Remaining Performance Obligations — The Company’s arrangements with its customers often have terms that span over multiple years. However, the Company generally allows its customers to terminate contracts for convenience prior to the end of the stated term with less than twelve months’ notice. Revenue allocated to remaining performance obligations represents non-cancelable contracted revenue that has not yet been recognized, which includes deferred revenue and, in
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certain instances, amounts that will be invoiced. The Company has elected the practical expedient allowing the Company to not disclose remaining performance obligations for contracts with original terms of twelve months or less. Cancellable contracted revenue, which includes customer deposit liabilities, is not considered a remaining performance obligation. As of December 31, 2023 and 2022, the Company did not have any related performance obligations for contracts with terms exceeding twelve months.
Disaggregation of Revenue
For the years ended December 31,
Termination expense reimbursement (one time) — 719,565
Contract Balances—The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in liabilities consisting of either deferred revenue (a “contract liability”) or customer deposit liabilities. Deferred revenue represents billings under non-cancelable contracts before the related product or service is transferred to the customer. Such amounts are recognized by the Company over the life of the contract upon meeting the revenue recognition criteria, but generally within one year. Customer deposit liabilities consist of billings or payments received in advance of the start of the contractual term or for anticipated revenue-generating activities for the portion of a contract term that is subject to cancellation for convenience. Certain of the Company’s arrangements generally include terms that allow the customer to terminate the contract for convenience and receive a refund of the amount of the customer deposit for the percentage of the work not performed prior to the notice of termination. In these arrangements, the Company concluded there are no enforceable rights and obligations after such notice period and therefore, the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposit liabilities.
The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.
Costs to Obtain and Fulfill Contracts—Incremental costs of obtaining a contract include only those costs that are directly related to the acquisition of contracts, including sales commissions, and that would not have been incurred if the contract had not been obtained. In alignment with ASC 340, Other Assets and Deferred Costs ("ASC 340"), the Company recognizes an asset for the incremental costs of obtaining a contract with a customer if we expect to recover the costs. The Company elected to apply the practical expedient in accordance with ASC 340 which allows the Company to expense commissions as incurred when the contract term is twelve months or less in total. Costs to obtain contracts and costs to fulfill contracts were not material in the periods presented.
Warrants—The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”), depending on the specific terms of the warrant agreement.
Cost of Services Provided — Cost of services generally consists of the cost of hosting fees, materials, and cost of labor associated with professional services rendered. Depreciation and amortization expense is not included in Cost of services.
Research and Development—Research and development costs are expensed as incurred and consist primarily of personnel costs such as salaries and benefits and relate primarily to time spent during the preliminary project stage, post implementation maintenance, bug fixes associated with Capitalized internal-use software activities, and front-end application development in which technological feasibility has not been established. Depreciation and amortization expense is not included in Research and development.
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Advertising—Advertising costs are expensed as incurred. Advertising and marketing expense totaled and $224 thousand and $217 thousand for the years ended December 31, 2023 and 2022, respectively.
Stock-Based Compensation—The Company accounts for its stock-based compensation arrangements at fair value. Fair value of each stock-based award is estimated on the date of grant using either the Black-Scholes-Merton Model for stock options granted or using the fair value of a common stock for stock grants and restricted stock units. The Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common shares, the expected term of the share option, the expected volatility of the price of our common shares, risk-free interest rates, and the expected dividend yield of common shares. The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. The calculated fair value is recognized as expense over the requisite service period using the straight-line method. Forfeitures are accounted for in the period in which they occur. Trust Stamp offers the indirect repurchase of shares through a net-settlement feature upon the vesting of RSU awards to satisfy minimum statutory tax-withholding requirements for the recipient.
Income Taxes— The Company records income tax provisions for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. The deferred assets and liabilities are measured using the statutorily enacted tax rates anticipated to be in effect when those tax assets and liabilities are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for a valuation allowance.
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 benefit (expense). The Company adjusts these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and operating results.
The Company computes its tax provision for interim periods by applying the estimated annual effective tax rate to year-to-date pre-tax income from recurring operations and adjusting for discrete tax items arising in that quarter. There were no discrete items that impacted the effective tax rate for the years ended December 31, 2023 and 2022, respectively. The rate remained consistent over the period due to the full valuation allowance recorded in the period.
The Company had an effective tax rate of 0% for the years ended December 31, 2023 and 2022, respectively. The Company has incurred U.S. operating losses and has minimal profits in foreign jurisdictions.
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Company’s past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies.
The Company had no unrecognized tax benefits as of December 31, 2023 and 2022.
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It is the Company’s policy to recognize interest and penalties related to income tax matters in Income tax benefit (expense). The Company has not accrued any penalties related to uncertain tax positions due to offsetting tax attributes as of December 31, 2023 and 2022.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitation. The only material jurisdiction where the Company is subject to potential examination by tax authorities is the U.S. (federal and state) for tax years 2020 through 2022.
Leases — The Company determines if a contract is a lease or contains a lease at the inception of the contract in accordance with Accounting Standards Update No. 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments ("ASC 842"). All leases are assessed for classification as an operating lease or a finance lease. The lease term begins on the commencement date, the date the Company takes possession of the property, and the commencement date is used to calculate straight-line expense for operating leases. The lease may include options to extend or terminate the lease. When it is reasonably certain that the option will be exercised, the Company reassess our conclusions to account for the modified contract.
Operating lease right-of-use assets represent the Company’s right to use an underlying asset during a lease term and are included in non-current assets on our consolidated balance sheet. Operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities are divided into two classifications on our consolidated balance sheet as a current liability, Short-term operating lease liabilities, and a non-current liability, Long-term operating lease liabilities. The Company does not have any finance lease right-of-use assets or finance lease liabilities.
The Company’s operating lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. The interest rate implicit in the lease is not readily determinable, therefore, the Company uses an estimated incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. The Company’s Operating lease right-of-use assets are also recognized at the applicable lease commencement date. The Operating lease right-of-use asset equals the carrying amount of the related operating lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable Operating lease right-of-use asset or operating lease liability.
The term of our leases equals the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also include options to renew or extend the lease (including by not terminating the lease) that we are reasonably certain to exercise. We establish the term of each lease at lease commencement and reassess that term in subsequent periods if a triggering event occurs. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term.
Some lease contracts include lease and non-lease components. Trust Stamp elected the practical expedient offered by ASC 842 to not separate the lease components from non-lease components. As a result, the Company accounts for leases as a single lease component.
In addition, the Company elected not to recognize right-of-use assets and lease liabilities for leases term of twelve months or less. The short-term lease expenses are recognized on a straight-line basis over the lease term.
Commitments and Contingencies — Liabilities for loss contingencies arising from claims, disputes, legal proceedings, fines and penalties, and other sources are recorded when it is probable that a liability has been or will be incurred and the amount of the liability can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of such legal costs from insurance policies are recorded as an offset to legal expenses in the period they are received.
Treasury Stock — Repurchased treasury stock is recorded at cost. When treasury stock is resold at a price different than its historical acquisition cost, the difference is recorded as a component of Additional paid-in capital in the consolidated balance sheets.
Net Loss per Share Attributable to Common Stockholders —Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potentially dilutive Class A Common Stock equivalents for the period. For the purposes of this calculation,
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stock-based awards, warrants, and the conversion option of convertible notes are considered to be potential common shares outstanding. Since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s potential common shares outstanding were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive.
Recent Accounting Pronouncements Not Yet Adopted—In December 2023, the FASB issued ASU 2023-09, Income Taxes – Improvements to Income Tax Disclosures. ASU 2023-09requires enhancements and further transparency to certain income tax disclosures, most notably the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024 on a prospective basis and retrospective application is permitted. The Company is currently evaluating the impacts of the new standard but does not expect a material impact to its consolidated financial statements or related disclosures.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify that an entity should measure the fair value of an equity security subject to contractual sale restriction the same way it measures an identical equity security that is not subject to such a restriction. The FASB said the contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not affect its fair value. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this guidance to have a material impact to its consolidated financial statements or related disclosures.
Recently Adopted Accounting Pronouncement— In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this standard as of January 1, 2023, and the guidance did not have a material impact on its consolidated financial statements or related disclosures.
2. Borrowings
Promissory Notes Payable
As of December 31,
In May 2020, the Company formed a subsidiary in the Republic of Malta, Trust Stamp Malta Limited, with the intent to establish a research and development center with the assistance of potential grants and loans from the Maltese government. As part of the creation of this entity, we entered into an agreement with the government of Malta for a potentially repayable advance of up to €800 thousand or $858 thousand to assist in covering the costs of 75% of the first 24 months of payroll costs for any employee who begins 36 months from the execution of the agreement on July 8, 2020. On February 9, 2021, the Company began receiving funds and as of December 31, 2023, the balance received was $884 thousand which includes changes in foreign currency rates.
The Company will pay an annual interest rate of 2% over the European Central Banks (ECB) base rate as set on the beginning of the year in review. If the ECB rate is below negative 1%, the interest rate shall be fixed at 1%. The Company will repay a minimum of 10% of Trust Stamp Malta Limited’s pre-tax profits per annum capped at 15% of the amount due to the Corporation until the disbursed funds are repaid. At this time, Trust Stamp Malta Limited does not have any revenue-
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generating contracts and therefore, we do not believe any amounts shall be classified as current.The Malta loan interest rate increased from 2.5% for the year ended December 31, 2022 to 4.5% for the year ended December 31, 2023.
3. Warrants
Liability Classified Warrants
The following table presents the change in the liability balance associated with the liability classified warrants, which are classified in Level 3 of the fair value hierarchy from January 1, 2022 to December 31, 2023:
Warrants ($)
Additional warrants issued —
Additional warrants issued —
Change in fair value (5,033)
As of December 31, 2023, the Company has issued a customer a warrant to purchase up to $1.00 million of capital stock in a future round of financing at a 20% discount of the lowest price paid by another investor. The warrant was issued on November 9, 2016. There is no vesting period, and the warrant expires on November 30, 2026. The Company evaluated the provisions of ASC 480, Distinguishing Liabilities from Equity, noting the warrant should be classified as a liability due to its settlement being for a variable number of shares and potentially for a class of shares not yet authorized. The warrant was determined to have a fair value of $250 thousand which was recorded as a Deferred contract acquisition asset and to a Warrant liability during the year ended December 31, 2016 and was amortized as a revenue discount prior to the current periods presented. The fair value of the warrant was estimated on the date of grant by estimating the warrant’s intrinsic value on issuance using the estimated fair value of the Company as a whole and has a balance of $250 thousand as of December 31, 2023.
On December 16, 2016, the Company issued an investor warrant to purchase $50 thousand worth of shares of our Class A Common Stock. The warrants have no vesting period and expires on December 16, 2026. The warrant agreement states that the investor is entitled to the “number of shares of Common Stock with a Fair Market Value as of the Determination Date of$50,000”. The determination date is defined as the “date that is the earlier of (A) the conversion of the investor’s Note into the equity interests of the Company or (B) the maturity date of the Note.” The investor converted the referenced Note on June 30, 2020, therefore, defining the determination date. The number of shares to be purchased is settled as 6,418 shares as of June 30, 2020. The exercise price of the warrants is variable until the exercise date.
The Company used a Black-Scholes-Merton pricing model to determine the fair value of the warrants and uses this model to assess the fair value of the warrant liability. As of December 31, 2023, the warrant liability is recorded at $7 thousand which is a $5 thousand decrease, recorded to Change in fair value of warrant liability, from the balance of $12 thousand as of December 31, 2022.
Fair Value of Warrants $0.93 — $2.01
Risk free interest rate 4.09% — 4.74%
Expected dividend yield — %
Expected term 3 years
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Equity Classified Warrants
As of December 31,
Warrant Issuance Date Strike Price 2023 2022
(1) As of December 31, 2023, all 775,330of the April 18, 2023 warrants and 106,670 of the June 5, 2023 warrants are held in abeyance for benefit of the institutional investor until notice from the institutional investor that the shares may be issued in compliance with the beneficial ownership limitation.
November 9, 2016
The Company has issued a customer a warrant to purchase 80,128 shares of Class A Common Stock with an exercise price of $3.12 per share. The warrant was issued on November 9, 2016. There is no vesting period, and the warrant expires on November 30, 2026.
January 23, 2020
In January 2020, the Company issued REach®, a related party, a warrant to purchase 186,442 shares of the Company’s Class A Common Stock at an exercise of $8.00 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 a value of $125 thousand. The warrants were issued on January 23, 2020. There is no vesting period, and the warrants expire on December 20, 2024.
January 23, 2020
In January 2020, the Company issued SCV, a related party, a warrant to purchase 932,111 shares of the Company’s Class A Common Stock at a strike price of $8.00 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 as 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.
On December 21, 2021, SCV executed a Notice of Exercise for certain of its warrants to purchase 407,512 shares of Class A Common Stock at an exercise price of $8.00 per share for a total purchase price of $3.26 million. The closing occurred on January 10, 2022 and resulted in total cash proceeds of $3.26 million to the Company for the warrant exercise.
The warrants to purchase the remaining 524,599 shares of the Company’s Class A Common Stock remain outstanding as of December 31, 2023.
August – December 2021 and January – February 2022
The Company issued 271,593 warrants from August 2021 to December 2021 and 15,421 warrants from January 2022 to February 2022 related to the Regulation CF, D, and S common stock and warrant offerings. These warrants became exercisable on January 26, 2022 when the Company received SEC qualification of its offering statement on Form 1-A. These warrants expire as of the earlier of: (a) January 26, 2023, (b) the acquisition of the Company by another entity, or (c) immediately prior to the closing of a firm commitment underwritten public offering. On August 25, 2022, we refunded
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$5,000 in units (comprised of common stock and warrants) sold in the Company's Regulation CF offering to two investors resulting in the cancellation of 250 warrants.
During the quarter ended December 31, 2022, investors exercised 2,850 warrants at an exercise price of $20.00 per share, resulting in total cash proceeds of $57 thousand to the Company for the warrant exercises.
The warrants to purchase the remaining 283,914 shares of the Company’s Class A Common Stock expired on January 26, 2023 and are no longer outstanding as of December 31, 2023.
September 14, 2022
On September 11, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with Armistice Capital Master Fund Ltd. Pursuant to the terms of the SPA, the Company agreed, at the closing of the SPA, to sell and issue to the Armistice Capital Master Fund Ltd. in a private placement 195,000 shares of Class A Common Stock of the Company and warrants to purchase 390,000 shares of Class A Common Stock of the Company at an exercise price of $8.85 for a total purchase price of $1,511,250. The Company incurred offering costs of $90,675 from this transaction that were recorded as a reduction of the gross proceeds. The 390,000 warrants may be exercised at any time by Armistice Capital Master Fund Ltd. starting on the issuance date, September 14, 2022, until the five year and six-month anniversary thereafter.
The warrants also allow for a “cashless exercise” if, at any time after the six (6) month anniversary of the issue date of the warrants there is no effective registration statement registering the resale of the Class A Common Stock issuable pursuant to the warrants. In such a case, then warrants may also be exercised, in whole or in part, by means of a cashless exercise in which Armistice Capital Master Fund Ltd. will be entitled to receive a number of shares of Class A Common Stock as described in the warrants. Trust Stamp filed the registration statement on September 30, 2022 and received the notice of effectiveness on January 26, 2023.
On June 5, 2023, the Company entered into an Amendment to Existing Warrants agreement with Armistice Capital Master Fund Ltd. Pursuant to the terms of the Amendment to Existing Warrants, the exercise price for the warrants to purchase 390,000 shares of Class A Common Stock of the Company is reduced to $2.30 for a total purchase price of $897,000. In addition, the expiration date for the 390,000 warrants is amended allowing the exercise of the warrant at any time by Armistice Capital Master Fund Ltd. starting on the closing of the offering, June 5, 2023, until the five year anniversary thereafter.
On August 18, 2023, the institutional investor exercised 270,000 warrants to purchase shares of Class A Common Stock of the Company at a price of $2.30 per warrant, resulting in an issuance by the Company of 270,000 shares of Class A Common Stock for total proceeds of $621,000.
On December 21, 2023, the Company entered into an Inducement Agreement with Armistice Capital Master Fund Ltd. Pursuant to the terms of the Inducement Agreement, the exercise price for the warrants to purchase the remaining 120,000 shares of Class A Common Stock of the Company was reduced to $1.34 for a total purchase price of $160,800.
On December 21, 2023, the remaining 120,000 common stock purchase warrants to purchase shares of Class A Common Stock of the Company at a price of $1.34 per warrant, resulting in an issuance by the Company of 120,000 shares of Class A Common Stock for total proceeds of $160,800.
All warrants related to this investment have been exercised and are no longer outstanding as of December 31, 2023.
April 18, 2023
On April 14, 2023, the Company entered into a securities purchase agreement (“SPA”) with Armistice Capital Master Fund Ltd. Pursuant to which the Company agreed to issue and sell to the investor (i) in a registered direct offering, 563,380 shares of Class A Common Stock, par value $0.01 per share of the Company at a price of $3.30 per share, and pre-funded warrants to purchase up to 1,009,950 shares of Class A Common Stock, at a price of $3.299 per prefunded warrant, at an exercise price of $0.001 per share of Class A Common Stock, and (ii) in a concurrent private placement, common stock purchase warrants, exercisable for an aggregate of up to 1,573,330 shares of Class A Common Stock, at an exercise price of $3.30 per share. On April 18, 2023, the Company sold 563,380 shares of Class A Common Stock to the institutional investor at a price of $3.30 per share for total proceeds $1,859,154. Additionally, on same date, the institutional investor purchased and exercised the 1,009,950 pre-funded warrants, for total proceeds to the Company of $3,332,835, resulting in
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an aggregate issuance by the Company of 1,573,330 shares of Class A Common Stock for net proceeds of $4,778,550 from the registered direct offering after deducting placement fee and legal expense of $363,439 and $50,000, respectively.
On December 21, 2023, the Company entered into an Inducement Agreement with Armistice Capital Master Fund Ltd. Pursuant to the terms of the Inducement Agreement, the exercise price for the warrants to purchase the remaining 1,573,330 shares of Class A Common Stock of the Company was reduced to $1.34 for a total purchase price of $2,108,262.
On December 21, 2023, the remaining 1,573,330 common stock purchase warrants to purchase shares of Class A Common Stock of the Company at a price of $1.34 per warrant were exercised for total proceeds of $2,108,262.
As of December 31, 2023, the Company had received Notice to Exercise for 798,000 common stock purchase warrants resulting in an issuance by the Company of 798,000 shares of Class A Common Stock. Due to the beneficial ownership limitation provisions in the Inducement Agreement, as of December 31, 2023 the remaining 775,330 common stock purchase warrants exercised on December 21, 2023 were unissued and held in abeyance for benefit of the institutional investor until notice from the institutional investor that the shares may be issued in compliance with the beneficial ownership limitation. On February 7, 2023 and February 27, 2023, the Company issued 320,000 and 455,330 shares, respectively.
June 5, 2023
On June 1, 2023, the Company entered into a securities purchase agreement (“SPA”) with an Armistice Capital Master Fund Ltd. Pursuant to which the Company agreed to issue and sell to the investor (i) in a registered direct offering, 736,400 shares of Class A Common Stock, par value $0.01 per share of the Company at a price of $2.30 per share, and pre-funded warrants to purchase up to 543,300 shares of Class A Common Stock, at a price of $2.299 per prefunded warrant, at an exercise price of $0.001 per share of Class A Common Stock, and (ii) in a concurrent private placement, common stock purchase warrants, exercisable for an aggregate of up to 1,279,700 shares of Class A Common Stock, at an exercise price of $2.30 per share. On June 5, 2023, the Company sold 736,400 shares of Class A Common Stock to the institutional investor at a price of $2.30 per share for total proceeds of $1,693,720. Additionally, on same date, the institutional investor purchased the 543,300 pre-funded warrants at a price of $2.299 per prefunded warrant, for total proceeds to the Company of $1,249,047, resulting in an issuance by the Company of 736,400 shares of Class A Common Stock for net proceeds of $2,686,773 from the registered direct offering after deducting placement fee and legal expense of $205,994 and $50,000, respectively.
On June 12, 2023, the institutional investor exercised 322,300 pre-funded warrants at a price of $0.001 per prefunded warrant, resulting in an issuance by the Company of 322,300 shares of Class A Common Stock for total proceeds of $322. Additionally, on June 23, 2023, the institutional investor exercised 221,000 pre-funded warrants at a price of $0.001 per prefunded warrant, resulting in an issuance by the Company of 221,000 shares of Class A Common Stock for total proceeds of $221.
On December 21, 2023, the Company entered into an Inducement Agreement with Armistice Capital Master Fund Ltd. Pursuant to the terms of the Inducement Agreement, the exercise price for the common stock purchase warrants to purchase the remaining 1,279,700 shares of Class A Common Stock of the Company was reduced to $1.34 for a total purchase price of $1,714,798.
On December 21, 2023, the institutional investor exercised 106,670 warrants to purchase shares of Class A Common Stock of the Company at a price of $1.34 per warrant for total proceeds of $142,938.
As of December 31, 2023, due to the beneficial ownership limitation provisions in the Inducement Agreement, the 106,670 warrants were unissued and held in abeyance for benefit of the institutional investor until notice from the institutional investor that the shares may be issued in compliance with the beneficial ownership limitation. These shares were subsequently issued on February 27, 2023.
The common stock purchase warrants to purchase 1,279,700 shares of the Company’s Class A Common Stock remain outstanding as of December 31, 2023.
December 21, 2023
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On December 21, 2023, the Company entered into a warrant exercise agreement (the “WEA”) with a certain existing institutional investor, pursuant to which the institutional investor agreed to exercise (the “Exercise”) (i) a portion (106,670) of the warrants issued to the institutional investor on June 5, 2023, which are exercisable for 1,279,700 shares of the Company’s Class A Common Stock, par value $0.01 per share (“Class A Common Stock”) with a current exercise price of $2.30 per share (the “June 2023 Warrants”), (ii) all of the warrants issued to the institutional investor on September 14, 2022, as amended on June 5, 2023, which are exercisable for 120,000 shares of Class A Common Stock, with a current exercise price of $2.30 per share (the “September 2022 Warrants”), and (iii) all of the warrants issued to the institutional investor on April 18, 2023, which are exercisable for 1,573,330 shares of Class A Common Stock, with a current exercise price of $3.30 per share (the “April 2023 Warrants” and collectively with all of the June 2023 Warrants and the September 2022 Warrants, the “Existing Warrants”). In consideration for the immediate exercise of 1,800,000 of the Existing Warrants for cash, the Company agreed to reduce the exercise price of all of the Existing Warrants, including any unexercised portion thereof, to $1.34 per share, which is equal to the most recent closing price of the Company’s Class A Common Stock on The Nasdaq Stock Market prior to the execution of the WEA. As of December 31, 2023, Armistice had submitted an Exercise Notice for 918,000 Existing Warrants and the shares of Class A Common Stock were issued to the warrant holders. The remaining 882,000 Existing Warrants from this exercise are held in abeyance until the Company receives notice from the holders that the remaining shares may be issued in compliance with the beneficial ownership limitation. As of the date of this report, the remaining 882,000 Existing Warrants have been issued.
In addition, in consideration for such Exercise, the Selling Stockholder received new unregistered warrants to purchase up to an aggregate of 3,600,000 shares of Class A Common Stock, equal to 200% of the shares of Class A Common Stock issued in connection with the Exercise, with an exercise price of $1.34 per share (the “New Warrants”) in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”).
All 3,600,000 of the New Warrants remain outstanding as of December 31, 2023.
4. Balance Sheet Components
Prepaid expenses and other current assets
Prepaid expenses and other current assets as of December 31, 2023 and 2022 consisted of the following:
As of December 31,
Prepaid expenses and other current assets $ 826,781 $ 580,086
Capitalized internal-use software, net
Capitalized internal-use software, net as of December 31, 2023 and 2022 consisted of the following:
As of December 31,
Amortization expense is recognized on a straight-line basis and for the years ended December 31, 2023 and 2022 totaled $557 thousand and $517 thousand, respectively.
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The Company determined that as of December 31, 2023, $19 thousand of Capitalized internal-use software was impaired. The impaired Capitalized internal-use software was expensed to Research and development during the year ended December 31, 2023.
Property and equipment, net
Property and equipment, net as of December 31, 2023 and 2022 consisted of the following:
As of December 31,
Depreciation expense is recognized on a straight-line basis and for the years ended December 31, 2023 and 2022 totaled $72 thousand and $136 thousand, respectively.
On April 26, 2023, the Company sold a portion of the mobile hardware for a gross sales price of $180 thousand and a gain of $108 thousand. On May 26, 2023, the Company sold another portion of the mobile hardware for a gross sales price of $197 thousand and a gain of $108 thousand.
Accrued expenses
Accrued expenses as of December 31, 2023 and 2022 consisted of the following:
As of December 31,
Accrued mobile expenses — 177,099
5. Goodwill and Intangible Assets, Net
There were no changes in the carrying amount of Goodwill for the years ended December 31, 2023 and 2022.
Intangible assets, net as of December 31, 2023 and 2022 consisted of the following:
As of December 31,
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The Company determined that as of December 31, 2023, $12 thousand of Patent application costs were impaired. The impaired Patent application costs were expensed to Selling, general, and administrative expense during the year ended December 31, 2023.
The Company added 4 patents and 1 trademark during the year ended December 31, 2023. The patents issued during the year ended December 31, 2023 increased our total number of patents to 17 and include:
•On August 29, 2023, the Company received Notice of Issuance together with a Notice of Allowance on August 17, 2023 both entitled “Systems and Processes for Lossy Biometric Representation.” These patents further expand our intellectual property portfolio related to the tokenization of biometric data and broaden our patent coverage by removing the necessity to use a neural network in our irreversible transformation process.
•On August 15, 2023, the Company received Notice of Issuance for a patent entitled “Systems and Methods for Identity Authentication via Third Party Accounts.” This technology, while leveraging our core privacy-first technologies, provides an optional interlock between different types of user accounts benefiting from the strengths that each can offer in terms of user authentication to produce a more resilient user-centric ecosystem.
•On July 25, 2023, the Company received Notice of Issuance for a patent entitled “Systems and Methods for Privacy-Secured Biometric Identification and Verification.” For the last six years we have invested heavily in research and development which has created a solid foundation for our current and future generations of cutting edge, privacy-first identity products and this patent reflects our systems and methods for matching an encrypted biometric input record with stored encrypted biometric record without data decryption of the input and at least one stored record.
•On June 20, 2023, the Company received Notice of Issuance for a patent entitled “Ownership Validation for Cryptographic Asset Contracts Using Irreversibly Transformed Identity Tokens.” This technology expands the range of use cases for the IT2 into NFT’s and the Metaverse by verifying the ownership of cryptographic asset contracts using embedded IT2 technology. Cryptographic assets are typically associated with a particular digital address ("digital wallet") which are vulnerable to fraud, pilferage, and user errors. The new patent addresses the long-felt but unresolved need for improved systems and processes for validating ownership of cryptographic assets.
Intangible asset amortization expense is recognized on a straight-line basis and for the years ended December 31, 2023 and 2022 totaled $160 thousand and $107 thousand, respectively.
Estimated future amortization expense of Intangible assets, net is as follows:
Years Ending December 31, Amount
6. Income Taxes
Net loss before taxes consisted of the following:
For the years ended December 31,
The components of income tax benefit (expense) are as follows:
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For the years ended December 31,
Current:
U.S. Federal $ — $ —
Deferred:
U.S. Federal $ — $ —
U.S. State — —
Non-U.S. — —
$ — $ —
Total income tax benefit (expense) $ (13,485) $ 21,076
A reconciliation of the expected tax provision (benefit) at the statutory federal income tax rate to the Company’s recorded tax provision (benefit) consisted of the following:
For the years ended December 31,
State income taxes, net of federal benefit 1,560 4,081
Prior year deferred tax adjustments (84,169) —
Total provision (benefit) for income taxes $ (13,485) $ 21,076
Temporary differences that give rise to significant portions of the deferred tax assets are as follows:
As of December 31,
Deferred Tax Assets:
Deferred Tax Liabilities:
Capitalized internal-use software, net (88,041) (198,051)
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Deferred Tax Assets, Net $ — $ —
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Company’s past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods, and the implementation of tax planning strategies.
Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. The Company’s cumulative losses in recent years are the most compelling form of negative evidence considered by management in making this determination. For the years ended December 31, 2023 and 2022, the net increase in the total valuation allowance was $1,901,622 and $3,146,272, respectively, and management has determined that based on all available evidence, a valuation allowance of $11,232,951 and 9,363,348 is appropriate at December 31, 2023 and 2022, respectively.
At December 31, 2023, the Company had Federal net operating loss carrying forwards of $19,127,170. Net operating losses generated for years ending December 31, 2017 and prior total $574,051 and will expire in 2037. Net operating losses generated beginning in 2018 total $18,553,119 and have an indefinite life. At December 31, 2023, the Company had state net operating loss carry forwards of $3,743,893. State net operating losses generated for years ending December 31, 2017 and prior total $574,051 and will expire in 2037. Net operating losses generated beginning in 2018 total $3,169,842 and have an indefinite life. At December 31, 2023, the Company had foreign net operating loss carry forwards of $11,859,008 with an indefinite carry forward period. Foreign net operating losses of $975,242 will begin to expire in 2026.
Included in the balance of unrecognized tax benefit as of December 31, 2023 and December 31, 2022, are $129,082 and $83,765, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes accrued interest related to unrecognized tax expenses and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued $0 of interest during 2023, and $0 of penalty, and in total, as of December 31, 2023 has recognized $0 of interest and penalty.
The Company is subject to taxation in the US and various state jurisdictions. As of December 31, 2023 the Company’s tax returns for 2020, 2021, and 2022 are subject to full examination by the tax authorities. As of December 31, 2023, the Company is generally no longer subject to state or local examinations by tax authorities for years before 2020, except to the extent of NOLs generated in prior years claimed on a tax return.
7. Net Loss per Share Attributable to Common Stockholders
The following table presents the calculation of basic and diluted net loss per share:
For the years ended December 31,
Numerator:
Denominator:
Net loss per share attributable to common stockholders $ (1.07) $ (2.55)
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The following potentially dilutive securities were excluded from the computation of diluted net loss per share calculations for the periods presented because the impact of including them would have been anti-dilutive:
As of December 31,
8. Stock Awards and Stock-Based Compensation
From time to time, the Company may issue stock awards in the form of Class A Common Stock grants, Restricted Stock Units (RSUs), or Class A Common Stock options with vesting/service terms. Stock awards are valued on the grant date using the Company’s common stock share price quoted on an active market. Stock options are valued using the Black-Scholes-Merton pricing model to determine the fair value of the options. We generally issue our awards in terms of a fixed monthly value, resulting in a variable number of shares being issued, or in terms of a fixed monthly share number.
During the years ended December 31, 2023 and 2022, the Company entered into agreements with advisory board members and other external advisors to issue cash payments and stock awards in exchange for services rendered to the Company monthly. The total granted stock-based awards to advisory board members and other external advisors during the years ended December 31, 2023 and 2022 included grants totaling, $6 thousand and $49 thousand, respectively, options totaling $0, and RSUs totaling $36 thousand and $190 thousand, respectively.
In addition to issuing stock awards to advisory board members and other external advisors, during the years ended December 31, 2023 and 2022, the Company granted stock-based awards to multiple employees. The total granted stock-based awards to employees during the years ended December 31, 2023 and 2022 included grants totaling, $82 thousand and $307 thousand, respectively, options totaling $12 thousand and $57 thousand, respectively, and RSUs totaling $627 thousand and $1.80 million, respectively.
The following table summarizes stock option activity for the years ended December 31, 2023 and 2022:
Options canceled and forfeited (4,186) 5.73
The aggregate intrinsic value of options outstanding, exercisable, and vested is calculated as the difference between the exercise price of the underlying options and the fair value of the Company’s common stock. The aggregate intrinsic value of options exercised during the years ended December 31, 2023 and 2022 was $0.
The weighted average grant-date fair value of options granted during the years ended December 31, 2023 and 2022 was $1.08 and $7.65 per share, respectively. The total grant-date fair value of options that vested during the years ended December 31, 2023 and 2022 was $12 thousand and $57 thousand, respectively.
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The following assumptions were used to calculate the fair value of options granted during the year ended December 31, 2023:
Fair value of Class A Common Stock $0.38 — 1.67
Risk free interest rate 3.76 — 4.89%
Expected dividend yield 0.00 %
Expected term 3 Years
As of December 31, 2023, the Company had 393,583 stock options outstanding of which all are fully vested options.
As of December 31, 2023, the Company has 71,407 common stock grants outstanding of which 60,168 were vested but not issued and 11,239 were not yet vested. All granted and outstanding common stock grants will fully vest by December 31, 2024. The Company had unrecognized stock-based compensation related to common stock grants of $9 thousand as of December 31, 2023.
As of December 31, 2023, the Company had 446,102 RSUs outstanding of which 47,813 were vested but not issued and 398,289 were not yet vested. All granted and outstanding RSUs will fully vest by August 1, 2024. The Company had unrecognized stock-based compensation related to RSUs of $25 thousand as of December 31, 2023.
A summary of outstanding RSU activity as of December 31, 2023 is as follows:
RSU Outstanding Number of Shares
Forfeited —
Stock-based compensation expense
Our consolidated statements of operations include stock-based compensation expense as follows:
For the years ended December 31,
9. Stockholders’ Equity
Common Stock — As of December 31, 2023, the Company was authorized to issue 50,000,000 Common Stock. Pursuant to the Company’s Third Amended & Restated Certificate of Incorporation, the Board of Directors of the Company has the right to designate shares of the Company’s Common Stock as either Class A or Class B Common Stock. As of December
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31, 2023 and 2022, all shares of Common Stock of the Company have been designated as Class A Common Stock, and there is no issued (or designated) Class B Common Stock.
The Class A Shares and Class B Shares are identical in all respects except as stated below. The holders of Class A Shares are entitled to one vote for each Class A Share held at all meetings of stockholders. Except as required by applicable law, the holders of Class B Shares shall have no voting rights with respect to such shares; provided, that the holders of Class B shares shall be entitled to vote (one vote for each Class B Share held) to the same extent that the holders of Class A Shares would be entitled to vote on matters as to which non-voting equity interests are permitted to vote.
Preferred Stock — On July 6, 2023, the Company received confirmation of the acceptance of its Third Amended and Restated Certificate of Incorporation (the "A&R Certificate of Incorporation") from the Secretary of State of Delaware. The A&R Certificate of Incorporation was approved by the Company’s stockholders by written consent pursuant to a definitive proxy statement filed with the Securities and Exchange Commission on April 13, 2023. Written consent from the majority of stockholders was received as of May 13, 2023. The A&R Certificate of Incorporation maintained the 50,000,000 authorized shares of Common Stock and eliminated the authorized Preferred Stock.
Liquidation Rights — In the event of a voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of Class A Common Stock are entitled to share ratably in the net assets legally available for distribution to shareholders after the payment of all debts and other liabilities of the Company.
Voting Rights — Holders of shares of Class A Common Stock are entitled to one vote for each on all matters submitted to a vote of the shareholders, including the election of directors. Holders of shares of Class B Common Stock have no voting rights with respect to such shares; provided that the holders of Class B Common Stock shall be entitled to vote (one vote for each Class B share held) to the same extent that the holders of Shares of Class A Common Stock would be entitled to vote on matters as to which non-voting equity interests are permitted to vote pursuant to 12 C.F.R. § 225.2(q)(2) (or a successor provision thereto).
Dividends — Holders of each class of Common Stock are entitled to receive dividends, as may be declared from time to time by the Board of Directors out of legally available funds as detailed in our A&R Certificate of Incorporation. The Company has never declared or paid cash dividends on any of its capital stock and currently does not anticipate paying any cash dividends after this offering or in the foreseeable future.
10. Related Party Transactions
Related party payables of $82 thousand and $273 thousand as of December 31, 2023 and 2022, respectively, primarily relate to amounts owed to 10Clouds, the Company’s contractor for software development and investor in the Company, and smaller amounts payable to members of management as expense reimbursements. Total costs incurred in relation to 10Clouds for the years ended December 31, 2023 and 2022, totaled approximately $816 thousand and $935 thousand, respectively.
Legal Services
A member of management provides legal services to the Company from a law firm privately owned and separate from the Company. Certain services are provided to the Company through this law firm. Total expenses incurred by the Company in relation to these services totaled $0 and $138 thousand during the years ended December 31, 2023 and 2022, respectively. Amounts payable as of December 31, 2023 and 2022 were $0.
Options Agreement
The Company has agreed, with effect from November 13, 2020, to grant a three-year loan in the amount of $335 thousand with an abated interest rate of 0.25% per annum to an advisory contractor to purchase 281,648 options. The options provide for the right to acquire shares of Class A Common Stock at a strike price of $6.00 per share. The options have no vesting period and will expire in November 2023. The loan was repaid with in-kind services from the contractor at a rate of $9 thousand per month for 36 months with the first payment receipt in April 2020 and the final payment received in February 2023. As of December 31, 2023 and 2022, the shareholder loan balances were $0 and $19 thousand, respectively.
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Mutual Channel Agreement
On November 15, 2020, the Company entered into a Mutual Channel Agreement with Vital4Data, Inc., a company at which one of our Directors serves as Chief Executive Officer. Pursuant to the agreement, the Company engaged Vita4Data, Inc. as a non-exclusive sales representative for the Company’s products and services. Vital4Data, Inc. is entitled to compensation in the form of commissions, receiving a 20% of commission-eligible on net revenue from sales generated by Vital4Data, Inc. in the first year of the contract term, which is reduced to 10% in the second year, and 5% in the third year. The Company has not earned or expensed any commissions pursuant to the Vital4Data, Inc. agreement to date. As of December 31, 2023 and 2022, the Vital4Data, Inc. commission due was $0.
11. Malta Grant
During July 2020 the Company entered into an agreement with the Republic of Malta that would provide for a grant of up to €200 thousand or $251 thousand as reimbursement for operating expenses over the first twelve months following Trust Stamp Malta’s incorporation in the Republic of Malta. The Company must provide an initial capital amount of €50 thousand or $62 thousand, which is matched with a €50 thousand or $62 thousand grant. The remaining €150 thousand or $190 thousand are provided as reimbursement of operating expenses twelve months following incorporation.
U.S. GAAP does not provide authoritative guidance regarding the receipt of economic benefits from government entities in return for compliance with certain conditions. Therefore, based on ASC 105-10-05-2, non-authoritative accounting guidance from other sources was considered by analogy in determining the appropriate accounting treatment, the Company elected to apply International Accounting Standards 20 – Accounting for Government Grants and Disclosure of Government Assistance and recognizes the expected reimbursements from the Republic of Malta as deferred income. As reimbursable operating expenses are incurred, a receivable is recognized (reflected within “Prepaid expenses and other current assets” in the consolidated balance sheets) and income is recognized in a similar systematic basis over the same periods in the consolidated statements of operations. During the years ended December 31, 2023 and 2022, the Company incurred $0 in expenses that are reimbursable under the grant. As of December 31, 2023, all amounts provided for under this grant were received.
On January 25, 2022, the Company entered into an additional agreement with the government of Malta for a grant of up to €100 thousand or $107 thousand, in terms of the ‘Investment Aid to produce the COVID-19 Relevant Product’ program, to support the proposed investment. The estimated value of the grant is €136,568 or $146,493, at an aid intensity of 75% to cover eligible wage costs incurred after February 1, 2022 in relation to new employees engaged specifically for the implementation of the project. On September 22, 2022, the Company entered into an amendment agreement that enables the Company to submit eligible employee expenses for reimbursement by October 31, 2022. The grant was approved in January 2022, however, the request for payment was not approved and management abandoned the agreement. Hence, during the years ended December 31, 2023 and 2022, the Company incurred $0, respectively, in expenses that are reimbursable under the grant. As of December 31, 2023, no amounts provided under this grant were received.
12. Leases and Commitments
Operating Leases— The Company leases office space in Atlanta, Georgia, which serves as its corporate headquarters, office space in Malta, which serves as its research and development facility, and vehicles in Malta that are considered operating lease arrangements under ASC 842 guidance. In addition. the Company contracts for month-to-month coworking arrangements in other office spaces in North Carolina, Denmark, Poland, and Rwanda to support its dispersed workforce. As of December 31, 2023, there were no minimum lease commitments related to month-to-month lease arrangements.
Initial lease terms are determined at commencement date, the date the Company takes possession of the property, and the commencement date is used to calculate straight-line expense for operating leases. Certain leases contain renewal options for varying periods, which are at the Company’s sole discretion. For leases where the Company is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the Company’s Operating lease right-of-use assets and Operating lease liabilities. The Company’s leases have remaining terms of 1 to 5 years. As the
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Company’s leases do not provide an implicit rate, the present value of future lease payments is determined using the Company’s incremental borrowing rate based on information available at the commencement date.
Lease term and discount rate December 31, 2023
Weighted average remaining lease term 2.41 years
Weighted average discount rate 5.0 %
During the year ended December 31, 2023, the Company terminated four leases including two offices in Malta and two vehicles in Malta. The terminated leases were operating leases. As a result of the terminations, the Company incurred $11 thousand in lease termination fees and recorded a loss of $669 related to this lease termination for the year ended December 31, 2023.
Leases terminated 4
Lease termination fees $ 10,932
Operating lease right-of-use assets derecognized upon lease termination $ 96,639
Lease liabilities derecognized upon lease termination $ 89,922
Loss recognized upon lease termination $ 669
On April 28, 2023, the Company extended the Malta office lease agreement, which would have ended on July 28, 2023, for a term of one additional year. The lease extension increased the Operating lease right-of-use asset by $82 thousand and the operating lease liability by $83 thousand. The Company classified the amended lease as an operating lease under ASC 842.
On November 25, 2023, the Company entered into a new motor vehicle lease in Malta, which has term of 60 months. The new lease increased the Operating lease right-of-use asset by $47 thousand and the operating lease liability by $41 thousand. The Company classified the new lease as an operating lease under ASC 842.
Balance sheet information related to leases as of December 31, 2023 and 2022 was as follows:
As of December 31,
Operating lease right-of-use assets
Operating lease liabilities
Short-term operating lease liabilities $ 81,236 $ 177,795
Future maturities of ASC 842 lease liabilities as of December 31, 2023 are as follows:
Principal Payments ImputedInterest Payments Total Payments
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Total lease expense, under ASC 842, was included in Selling, general, and administrative expenses in our consolidated statement of operations for the years ended December 31, 2023 and 2022 as follows: