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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2021

  Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission file number 001-41252

T Stamp Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

7372

    

81-3777260

(State or Other Jurisdiction of Incorporation or Organization)

(Primary Standard Industrial Classification Number)

(IRS Employer Identification Number)

3017 Bolling Way NE, Floors 1 and 2, Atlanta, GA 30305

(Address of registrant’s principal executive offices) (Zip code)

Registrant’s telephone number, including area code (404) 806-9906

Securities registered under Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

IDAI

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or has for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 

The registrant’s Class A Common Stock began trading on the NASDAQ Stock Exchange on January 31, 2022. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the registrant’s Class A Common Stock was last sold on the NASDAQ Stock Exchange on such date was $63.4 million (9,743,000 at a closing price per share of $6.51). Shares of Class A common stock outstanding— 23,530,021 shares at April 6, 2022.

Documents Incorporated by Reference

None

Auditor Name:

    

Auditor Location:

    

Auditor Firm ID:

Cherry Bekaert LLP

Atlanta, Georgia

677

Table of Contents

PART I.

3

Item 1.

Business

3

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

23

Item 3.

Legal Proceedings

23

Item 4.

Mine Safety Disclosures

23

PART II.

24

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

Item 6.

Selected Consolidated Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Price

46

Item 8.

Financial Statements and Supplementary Data

F-1

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets as of December 31, 2021 and 2020

F-2

Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020

F-3

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2021 and 2020

F-4

Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2021 and 2020

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

F-6

Notes to the Consolidated Financial Statements for the Years Ended December 31, 2021 and 2020

F-7

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

48

Item 9A.

Controls and Procedures

48

Item 9B.

Other Information

48

PART III.

49

Item 10.

Directors, Executive Officers and Corporate Governance

49

Item 11.

Executive Compensation

54

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

58

Item 13.

Certain Relationships and Related Transactions, and Director Independence

58

Item 14.

Principal Accounting Fees and Services

61

PART IV.

62

Item 15.

Exhibits, Financial Statement Schedules

62

2

PART I.

Item 1. Our Business

Organizational History

Trust Stamp was incorporated under the laws of the State of Delaware on April 11, 2016 as “T Stamp Inc.” The business was originally founded as “T Stamp LLC”, formed on November 9, 2015 as a Georgia limited liability company. In 2016, the Company effected a “hive down” business reorganization whereby the business of the Company was transferred into to a newly formed, wholly owned subsidiary, which was T Stamp Inc. (i.e. the Company). As of the date of this report, the Company is no longer a subsidiary of T Stamp LLC, and T Stamp LLC is no longer a majority owner of the Company.

Overview

Trust Stamp is an artificial intelligence company that develops proprietary identity solutions to help determine whether an individual is who they say they are and that they can be trusted, including Trust Stamp’s AI-powered facial biometrics that establish proof of life and are resistant to presentation attacks. In that example, a biometric capture can be converted into a tokenized identity (IT2) that is unique to the user but cannot be reverse engineered and rebuilt into the user’s face or other biometric data, does not constitute PII.

Each IT2can be stored in an Identity LakeTM or submitted to a zero-knowledge-proof matcher and compared to all other hashes allowing our AI to predict if a single subject generated two or more IT2 even if the subject has passed conventional KYC using (e.g.) falsified identity documents. Using this technology, the users’ IT2 can be used for re-authentication purposes including account recovery, password-less login, new account creation etc. across the organization or even within a consortium of organizations all in a low-cost and low friction delivery that is fast and secure.

Our technology is being used for enhanced due diligence, KYC/AML compliance and “second chance” approval for customer onboarding and account access together with the delivery of humanitarian and development services. Using our technology, an enterprise can approve more users, keep bad actors from accessing systems and services and retain existing users with a superior user experience.

We utilize micro-service architecture and highly scalable cloud computing resources with cutting-edge tools, power and agility such as GPU processing, neural networks and a Quantum Ledger Database to process data faster and more effectively than has previously been possible, as well as delivering products at a disruptively low cost that allows usage across multiple industries, including:

o Banking/FinTech
o Humanitarian & Development Services
o Biometrically Secured Email
o KYC/AML Compliance
o Law Enforcement
o P2P Transactions, Social Media, and Sharing Economy
o Real Estate

Our Background

We entered the market building facial-biometric authentication systems for onboarding, fraud-detection & safety applications. This allowed us to raise capital, generate revenue to fund our core AI microservices, and refine our technology using live data with informed consent from users. Following usage based upon facial biometrics, we started the process of hashing biometric data from 3rd party biometric service providers, initially touchless palm, and fingerprint templates. Our business model is now focused on licensing Annual Recurring Revenue (ARR) generating pay-per-use services implementing our hashing technology, limiting future pilots to very-large-scale use cases, using execution partners for commoditized implementations, and deploying our hashing technology with sector leading channel partners.

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Business Model

Trust Stamp’s business model is that of a technology licensing company – we license our products to companies that in turn integrate our technology into products and services which they either sell or use for their own purposes. We focus on licensing ARR generating pay-per-use services including:

o Biometric identity authentication
o Identity document authentication and fraud detection
o Tokenization of personal data including vaccination and other medical records
o Pay-per-use hashing services for biometric service providers, government, NGO, and enterprise users
o Tokenized-Identity Lakes and consortiums comprising IT2 for matching and de-duplication
o Zero-knowledge-proof and similar tools allowing IT2 to be used for matching or deduplication without the parties disclosing any underlying personal identifying information
o Digital payment authentication and implementation
o Proprietary knowledge-based authentication tools

In addition, we have developed an encrypted e-mail product (Trusted Mail ® www.trustedmail.pro) using our facial recognition technology. This technology is held in a majority owned subsidiary entity: Trusted Mail Inc.

The Market

Trust Stamp considers itself to be in the identity authentication market which is primarily comprised of biometric authentication providers. Trust Stamp’s key sub-markets are identity authentication for the purpose of account opening, access and fraud detection and the creation of tokenized identities to facilitate financial & societal inclusion. Management has evaluated the market potential for its services in part by reviewing the following reports and articles, none of which were commissioned by the Company and none are to be incorporated by reference:

o By 2025, biometrics will annually authenticate over $3 trillion of payment transactions, according to a 2021 report published by Juniper Research on Mobile Payment Security in 2021-2025.
o The global biometric system market size is projected to grow from $36.6 billion in 2020 to $68.6 billion by 2025 according to the November 2020 report “Biometric System Market with COVID-19 Impact by Authentication Type, Offering, Type, Vertical and Region - Global Forecast to 2025” published by ReportLinker.
o Annual online payment fraud losses from eCommerce, airline ticketing, money transfer and banking services, are estimated to cumulatively lose over $200 billion to online payment fraud between 2020 and 2024. Digital money transfer is the fastest growing payment fraud segment, with losses estimated to increase by 130% from 2020 to 2024 according to a 2020 report published by Juniper Research on Online Payment Fraud.
o According to the 2020 Year End Data Breach QuickView Report, 2020 saw 3,932 publicly disclosed breaches, exposing over 37 billion records.
o According to Grand View Research, the market size of the European Biometrics market was estimated to be USD 1.93 Billion in 2018 and is expected to grow at a CAGR of 17.5% to reach a market size of USD 5.97 Billion in 2025.

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According to a September 2019 article published by Forbes magazine on providing banking services to underserved populations:

o “Financial Inclusion” (i.e. providing banking and other financial services to those currently unbanked or underbanked) is a trillion-dollar opportunity
o 1.7 billion people lack basic financial services including a bank account
o 4 billion people are underbanked
o The GDP of emerging-market countries would surge $3.7 trillion by 2025, or 6%, if they adopted a single innovation—switching from cash to digital money stored on cellphones
o Providing the underbanked with access to credit and investments could create an additional $100 trillion in financial assets over the next 50 years

One of the biggest contributors to current authentication problems is the use of passwords. Static passwords (i.e. the type of password that we typically use to login to various accounts and services every single day that, for the most part, remains the same from the moment it is created) have a number of weaknesses:

oPlatforms often require regular changes;
oEasily guessable, exacerbated by social media and data mining;
oDiffering rules make complex passwords harder to remember;
oBrute force attacks are easier for hacking; and
oSingle passwords used on multiple accounts result in cascading data breaches.

According to a 2015 report published by Oxford University Department of Computer Sciences and Mastercard, 21% of users forget passwords within 2 weeks, 25% of users fail to remember at least 1 password per day, and 1 out of 3 online transactions are abandoned at checkout due to a forgotten password.

On top of this, stored biometric images and templates represent a growing and unquantified financial, security and PR liability and are the subject of growing governmental, media and public scrutiny, since biometric data cannot be “changed” once they are hacked, as they are intimately linked to the user’s physical features and/or behaviors.

With biometric technologies becoming nearly ubiquitous, a range of risks are becoming more prevalent. The popularity of biometric authentication across financial services, employment, travel and healthcare settings inevitably means biometric databases are becoming more accessible to criminals, and the motivation to take over biometric credentials is booming. Even when operating as intended, biometric technology raises privacy concerns which have led to close attention from regulators. Multiple jurisdictions have placed biometrics in a special or sensitive category of personal data and demand much stronger safeguards around collection and safekeeping.

To address this unprecedented danger, Trust Stamp has developed its IT2 solutions.

Principal Products and Services

Trust Stamp’s most important technology is the Irreversible Identity Token TM (also known as the IT2TMEvergreen HashTMEgHashTM and MyHashTM) combined with a data architecture that can use one or multiple sources of biometric or other identifying data. Once a “hash translation” algorithm is created, like-modality hashes are comparable regardless of their origin. The IT2 protects against system and data redundancy providing a lifelong “digital-DNA” that can store (or pivot to) any type of KYC or relationship data with fields individually hashed or (salted and) encrypted, facilitating selective data sharing. Products utilizing the IT2 are Trust Stamp’s primary products, accounting for the majority of its revenues during the year ended December 31, 2021.

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IT2 Solutions

The IT2 (for Irreversibly Transformed Identity Token) replace biometric templates and scans with meaningless numbers, letters and symbols in order to remove sensitive data from the reach of criminals using a proprietary process by which a deep neural network irreversibly converts biometric and other identifying data, from any source, into the secure tokenized identity. This IT2 is unique to the user, is different every time generated from a live subject and cannot be reverse engineered and rebuilt into the user’s face or other original identity data.

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Each token can be stored and compared to all other tokens from the same modality allowing the Company’s AI-powered analytics to predict if a single subject has generated two or more tokens, even if the subject has passed conventional KYC using, e.g., falsified identity documents. Using this technology, the users’ IT2 can be used for re-authentication purposes including account recovery, password-less login, new account creation, and more across the organization or even within a consortium of organizations, all in a low-cost and low friction delivery that is fast and secure.

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Our technology is being used for enhanced due diligence, KYC/AML compliance and “second chance” approval for customer onboarding and account access together with the delivery of humanitarian and development services. The solution allows organizations to approve more users, keep bad actors from accessing systems and services, and retain existing users with a superior user experience.

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Our hashing and matching technology can maximize the effectiveness of all types of identity data while rendering it safer to use, store and share. Whatever the source of identity data, it can be stored and compared as an IT2. See the chart below for examples.

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Distribution

Through licensing we allow customers to utilize our technology in a wide variety of applications. Uses can include (e.g.):

oThe provision of hashing / services to enterprises, NGOs, and government to overlay on third-party biometric and identity data
oHash licensing, translation, and certification services for biometric vendors
oManagement of zero-knowledge-proof services whether as a tributary between Identity Lakes or operating consortium lakes
oTokenized identity creation for large scale deployments such as humanitarian and government identity programs.

Trust Stamp enters into licensing agreements, typically as a hosted offering, on-premise solution or both, with its customers, pursuant to which the customer pays for the initial product development plus a license fee for the use of Trust Stamp’s technologies on a periodic and/or volume-based basis. In addition to consuming and paying for Trust Stamp’s services for their own use, some key customers also serve as channel partners by offering Trust Stamp products to their own customer base whether as stand-alone products or integrated into their own services as upgraded product offerings.

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Competition

We can work with any identity data from any source, potentially breaking vendor, and modality lock-in, but our primary market target is the biometric service industry which is growing exponentially while being threatened by a consumer, media, and legislative backlash against storing biometric data. The IT2 can potentially be overlaid on any biometric or other identity data provider.

In general, we compete for customer budget with any company in the identity authentication industry and our business plan calls for our capturing a fraction of one percent of the projected expenditure for biometric authentication services. Major competitors in this space include companies such as NEXT Biometrics, Gemalto, IDEMIA, Synaptics, Cognitec, Innovatrics, Suprema, FaceTec, Rank One Computing, Acuant, Jumio, Onfido and Mitek. However, we believe that, due to the uniqueness of our technology solution, the Company does not at this time have any direct competitors for the core IT2 solutions upon which the growth in our business plan is focused.

The commercial advantage of our solution is our ability to work across providers and modalities and we continue to pursue a first-mover advantage including our global-scale-partnership which is achieving a network-effect in the global Humanitarian and Development market. We believe that this combination will make it unattractive for a potential competitor to replicate the 6-years and multi-million dollars that we have already expended to try and circumvent our multiple (and continuing) patent filings and/or offer a parallel product based upon a different technology.

We believe that given sufficient time and resources, we can augment any biometric modalities including face, hand, iris, voice, gait, and behavior together with any other identifying data which places us in a unique position versus providers of biometric services.

We are unaware of any other provider being able to offer or support a proliferation of authentication modalities in this fashion, and therefore, we believe we there are no other companies that directly compete with us in this space. If our go-to-market strategy is successful, biometric service providers can be a channel distributer, and not necessarily a competitor.

Growth Strategy

Our business plan calls for our capturing a small fraction of one percent (1%) of the projected expenditure for biometric authentication services. Our strategy in this respect is to:

o Expand the scope and range of services that we provide to and through our existing clients
o Continue to add significant new clients for our current and future services
o Offer our services via channel partners with substantial distribution networks
o Offer our technology on a “low code” basis, providing access via an orchestration layer and/or open-APIs to enable implementation by a broader range of clients
o The addition of alternate authentication tools including non-facial-biometric options and non-biometric knowledge and device-based tools facilitating two and multi-factor authentication
o Offer our IT2 technology for use by other biometric and data services providers to protect and extend the usability of their data
o Provide ready-to-use / customizable platforms that leverage our IT2 technology in specialized markets

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Employees

Given the geographic diversity of its team and to facilitate cost-effective administration, Trust Stamp secures the services of its permanent team members through a variety of administrative structures that include wholly owned subsidiaries, professional employer organizations and consulting contracts. The Company currently has 13 full-time and 1 part-time team members that work out of the United States, as well as 28 full-time and 4 part-time team members that work out of Malta. We have 7 full-time team members in Poland and Central Europe and 5 full-time and 4 part-time team members in the United Kingdom as well as 1 full-time team member in the Isle of Man. We have 16 full-time team members working in the Philippines, 12 full-time team members working in Rwanda, 1 part-time team member working in the Netherlands and 7 full-time team members working remotely in India. Our permanent team is augmented as needed by contract development and other staff on both long and short-term basis.

Outsourcing

We design and develop our own products. We use an outsourcing company - 10Clouds - for additional development staff as needed. In addition, we also utilize SourceFit, a company in the Philippines, for PEO services, representing approximately 2-3% of our operating expenses in 2021. As we increase our in-house resources, we anticipate reducing our reliance upon development staff outsourcing. Amazon Web Services provides cloud hosting and processing services, representing approximately 2-3% of our operating expenses in 2021.

Key Customers

Historically, the Company generated most of its income through a relationship with a SP500 bank, in which services were provided pursuant to a Master Software Agreement and statements of work. The scope of services provided to the SP500 bank has grown throughout the relationship and additional growth has been seen in 2020 and 2021. In 2019, 2020 and continuing into 2021 the Company has also expanded its customer base to include relationships with Mastercard, FIS and other customers. In 2020 we engaged in accelerator programs and invested in new business development staff and systems which have led to new customer engagements in 2021 and, while we value the relationship highly, management believes that we are no longer financially dependent on our relationship with the SP500 bank. As an example, the SP500 bank and Mastercard made up 45% of total revenue during the year ended December 31, 2021 compared to 64% of total revenue during the year ended December 31, 2020.

The Company has continued to expand its customer base, such as its contract with the U.S. Immigration and Customs Enforcement (“ICE”). On September 23, 2021, the Company was awarded a $3,920,764 contract with ICE. This engagement required an investment in productization, business development, and satisfying extensive due diligence processes. Alongside the revenue implications of this specific contract, it is believed that a successful execution may lead to an extension and additional contracts of the same nature with ICE as well as creating an advantage for pursuing new customers. Effective March 27, 2022, Trust Stamp agreed to a bilateral modification of the fixed price purchase order announced in September 2021 with U.S. Immigration and Customs Enforcement (“ICE”), a federal agency under the U.S. Department of Homeland Security. The modification (which covers software development and services related to rapid enrolment in the ICE alternative to detention program) increases the total contract award value to $7,176,364 from the original $3,920,764 and extends the delivery period until September 26, 2022 (subject to a right of early termination by ICE).

Regulation

Our business is not currently subject to any licensing requirements in any jurisdiction in which we operate other than the requirement to hold a business license in the City of Atlanta (with which we are in compliance). This does not mean that licensing requirements may not be introduced in one or more jurisdiction in which we operate, and such requirements could be burdensome and/or expensive or even impose requirements that we are unable to meet.

We are subject to substantial governmental regulation relating to our technology and will continue to be for the lifetime of our Company. By virtue of handling sensitive PII and biometric data, we are subject to numerous statutes related to data privacy and additional legislation and regulation should be anticipated in every jurisdiction in which we operate. Example federal (US) and European statutes we could be subject to are:

o Health Insurance Portability and Accountability Act (HIPAA)

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o Health Information Technology for Economic and Clinical Health Act (HITECH)
o The General Data Protection Regulation 2016/679 (GDPR)

HIPAA and HITECH

Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act “HITECH”), the U.S. Department of Health and Human Services (“HHS”) issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information (“PHI”), used or disclosed by covered entities and business associates. Covered entities and business associates are subject to HIPAA and HITECH. Our subcontractors that create, receive, maintain, transmit, or otherwise process PHI on behalf of us are HIPAA “business associates” and must also comply with HIPAA as a business associate.

HIPAA and HITECH include privacy and security rules, breach notification requirements, and electronic transaction standards.

The privacy rules cover the use and disclosure of PHI by covered entities and business associates. The privacy rules generally prohibit the use or disclosure of PHI, except as permitted under certain limited circumstances. The privacy rules also set forth individual patient rights, such as the right to access or amend certain records containing his or her PHI, or to request restrictions on the use or disclosure of his or her PHI.

The security rules require covered entities and business associates to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI by implementing administrative, physical, and technical safeguards. Under HITECH’s Breach Notification Rule, a covered entity must notify individuals, the Secretary of the HHS, and in some circumstances, the media of breaches of unsecured PHI.

In addition, we may be subject to state health information privacy and data breach notification laws, which may govern the collection, use, disclosure, and protection of health-related and other personal information. State laws may be more stringent, broader in scope, or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other, which may complicate compliance efforts.

Entities that are found to be in violation of HIPAA as the result of a failure to secure PHI, a complaint about our privacy practices or an audit by HHS, may be subject to significant civil and criminal fines and penalties and additional reporting and oversight obligations if such entities are required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.

GDPR

The EU-wide General Data Protection Regulation imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data processing and policies. It requires data controllers to implement more stringent operational requirements for processors and controllers of personal data, including, for example, transparent and expanded disclosure to data subjects (in a concise, intelligible and easily accessible form) about how their personal information is to be used, imposes limitations on retention of information, increases requirements pertaining to health data and pseudonymized (i.e., key-coded) data, introduces mandatory data breach notification requirements and sets higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. Fines for non-compliance with the GDPR will be significant—the greater of €20 million or 4% of global turnover. The GDPR provides that EU member states may introduce further conditions, including limitations, to make their own further laws and regulations limiting the processing of genetic, biometric or health data.

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Intellectual Property

Patents

A summary of the Company’s issued patents and pending patent applications on March 31, 2022 is provided in the table below.

Matter No.

Application/
Patent No.

Filing/
Issue Date

Title

Priority Information

Status

32742-148154

63/306,210

2/3/2022

METAPRESENCE SYSTEMS AND PROCESSES FOR USING SAME

---

PENDING

02/03/2023 Provisional Conversion Due

32742-148672

63/309,819

2/14/2022

BIOMETRIC PRIVACY-ASSURED TIME AND LOCATION VERIFICATION

---

PENDING

02/14/2023 Provisional Conversion Due

32742-147459

63/287,276

12/08/2021

SHAPE OVERLAY FOR PROOF OF LIVENESS

---

PENDING

12/08/2022 Provisional Conversion Due

32742-146364

63/256,347

10/15/2021

OWNERSHIP VALIDATION FOR NFT CONTRACTS USING IRREVERSIBLY TRANSFORMED IDENTITY TOKENS

---

PENDING

10/15/2022 Provisional Conversion Due

32742-144545

63/278,276

11/11/2021

MULTI-FACTOR PROCESSES FOR ENHANCED DIGITAL SECURITY

---

PENDING

11/11/2022 Provisional Conversion Deadline

32742-145020

17/401,508

08/13/2021

SYSTEMS AND METHODS FOR IDENTITY VERIFICATION VIA THIRD PARTY ACCOUNTS

62/486,210

PENDING

Awaiting Examination

32742-145019

17/401,504

08/13/2021

SYSTEMS AND METHODS FOR LIVENESS-VERIFIED, BIOMETRIC-BASED ENCRYPTION

62/667,133

PENDING

Awaiting Examination

32742-142186

17/230,684

04/14/2021

SYSTEMS AND PROCESSES FOR MULTIMODAL BIOMETRICS

63/009,809

PENDING

Awaiting Examination

32742-141508

17/205,713

03/18/2021

SYSTEMS AND PROCESSES FOR TRACKING HUMAN LOCATION AND TRAVEL VIA BIOMETRIC HASHING

62/991,352

PENDING

Awaiting Examination

32742-139930

63/174,405

04/13/2021

PERSONALLY IDENTIFIABLE INFORMATION ENCODER
(NON-BIO)

---

PENDING

04/13/2022 Provisional Conversion Deadline

32742-139681

17/109,693

12/02/2020

SYSTEMS AND METHODS FOR PRIVACY-SECURED BIOMETRIC IDENTIFICATION AND VERIFICATION

62/942,311

PENDING

Awaiting Examination

32742-130398

16/403,093

11,288,530

05/03/2019

03/29/2022

SYSTEMS AND METHODS FOR LIVENESS-VERIFIED IDENTITY AUTHENTICATION

62/667,130

ISSUED

09/29/2025: First Maintenance Fee Due

32742-118398

15/342,994
10,924,473

11/03/2016
02/16/2021

TRUST STAMP

62/253,538

ISSUED

08/16/2024: First Maintenance Fee Due

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Matter No.

Application/
Patent No.

Filing/
Issue Date

Title

Priority Information

Status

32742-142411

17/324,544

05/19/2021

FACE COVER-COMPATIBLE BIOMETRICS AND PROCESSES FOR GENERATING AND USING SAME

63/027,072

PENDING

Awaiting Examination

32742-123473

15/955,270
11,095,631

04/17/2018
08/17/2021

SYSTEMS AND METHODS FOR IDENTITY VERIFICATION VIA THIRD PARTY ACCOUNTS

62/486,210

ISSUED

02/17/2025: First Maintenance Fee Due

32742-136046

16/855,576

11,263,439

04/22/2020

03/01/2022

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

15/782,940

ISSUED

09/01/2025 First Maintenance Fee Due

32742-136047

16/855,580

04/22/2020

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

15/782,940

ISSUED

08/08/2025 First Maintenance Fee Due

32742-136048

16/855,588

11,263,440

04/22/2020

03/01/2022

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

15/782,940

ISSUED

09/01/2025 First Maintenance Fee Due

32742-136049

16/855,594

11,263,441

04/22/2020

03/01/2022

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

15/782,940

ISSUED

09/01/2025 First Maintenance Fee Due

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Matter No.

Application/
Patent No.

Filing/
Issue Date

Title

Priority Information

Status

32742-136050

16/855,598

11,263,442

04/22/2020

03/01/2022

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

15/782,940

ISSUED

09/01/2025: First Maintenance Fee Due

32742-136051

16/855,606

04/22/2020

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

15/782,940

PENDING

05/24/2022 Issue Fee Payment Due

32742-130397

16/406,978

05/08/2019

SYSTEMS AND METHODS FOR ENHANCED HASH TRANSFORMS

62/668,610

PENDING
Awaiting Examination

32742-130399

16/403,106
11,093,771

05/03/2019
08/17/2021

SYSTEMS AND METHODS FOR LIVENESS-VERIFIED, BIOMETRIC-BASED ENCRYPTION

62/667,133

ISSUED

02/17/2025: First Maintenance Fee Due

32742-135668

16/841,269

04/06/2020

SYSTEMS AND PROCESSES FOR LOSSY BIOMETRIC REPRESENTATIONS

62/829,825

ISSUED

04/12/2022 Expected Issue Date

32742-118149

15/782,940
10,635,894

10/13/2017
04/28/2020

SYSTEMS AND METHODS FOR PASSIVE-SUBJECT LIVENESS VERIFICATION IN DIGITAL MEDIA

62/407,717
62/407,852
62/407,693

ISSUED

10/28/2023: First Maintenance Fee Due

32742-142741

63/188,491

05/14/2021

SECURE REPRESENTATIONS OF AUTHENTICITY AND PROCESSES FOR USING SAME

---

PENDING

05/14/2022 Provisional Conversion Due

32742-141468

63/177,494

04/21/2021

INTEROPERABLE BIOMETRIC REPRESENTATION

---

PENDING

04/21/2022 Provisional Conversion Due

32742-147631

17/706,132

03/28/2022

SYSTEMS AND METHODS FOR LIVENESS-VERIFIED IDENTITY AUTHENTICATION

16/403,093

PENDING

Awaiting Examination

32742-149165

17/702,366

03/23/2022

SYSTEMS AND PROCESSES FOR LOSSY BIOMETRIC REPRESENTATIONS

16/841,269

PENDING

Awaiting Examination

32742-149164

17/702,361

03/23/2022

SYSTEMS AND PROCESSES FOR LOSSY BIOMETRIC REPRESENTATIONS

16/841,269

PENDING

Awaiting Examination

32742-149163

17/702,355

03/23/2022

SYSTEMS AND PROCESSES FOR LOSSY BIOMETRIC REPRESENTATIONS

16/841,269

PENDING

Awaiting Examination

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Trademarks

The following is a summary of Trust Stamp’s issued and pending Trademarks as of March 31, 2022.

Serial / Registration Number

Filing Date

Trademark

Country

Status

Serial: 88/674,108

10/30/2019

TRUSTCARD

US

PENDING

SOU/3rd EOT Due: 05/10/2022

Serial: 90/041,950
Registration: 6,494,610

7/8/2020
9/21/2021

TRUSTED PAYMENTS

US

REGISTERED

Section 8 & 15 Renewal Due: 09/21/2027

Serial: 87/411,586
Registration: 5,329,048

4/14/2017
11/7/2017

TRUST STAMP

US

REGISTERED

Section 8 & 15 Renewal Due: 11/07/2023

Serial: 87/852,642
Registration:5,932,877

3/27/2018
12/10/2019

TRUSTED MAIL

US

REGISTERED

Section 8 & 15 Renewal Due: 12/10/2025

Serial: 8/256,534
Registration: 6,103,860

1/10/2019
9/26/2019

IDENTITY LAKE

US

REGISTERED

Section 8 & 15 Renewal Due: 07/14/2026

Serial: 88/708,795
Registration: 6,252,645

11/27/2019
1/19/2021

MYHASH

US

REGISTERED

Section 8&15 Renewal Due: 01/19/2027

Serial: 88/709,274
Registration: 6,252,649

11/27/2019
1/19/2021

TRUSTED PRESENCE

US

REGISTERED

Section 8&15 Renewal Due: 01/19/2027

Subsidiaries and Affiliates

Given the geographic diversity of our team and to facilitate cost-effective administration, Trust Stamp conducts various aspects of its operations through subsidiaries. All subsidiaries share resources across the entire Trust Stamp organization. The officers and directors of Trust Stamp have influence over the operations of all subsidiaries and employees across jurisdictions. Only one of our subsidiaries, Biometric Innovations Limited, has its own management team.

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T Stamp Inc. Corporate Structure Chart

Graphic

TStamp Incentive Holdings LLC. On April 9, 2019, management created a new entity, TStamp Incentive Holdings (“TSIH”) to which the Company issued 1,620,565 shares of Class A Common Stock that the Board of Directors of TSIH could use for employee stock awards in the future. The purpose of the entity was to provide an analogous structure to a traditional stock incentive plan. As of the date of this report, 282,565 shares of Class A Common Stock are still held by TSIH – however, all of these shares of Class A Common Stock have been allocated for issuance pursuant to RSUs that vested on January 2, 2022. The Company has no plans to issue additional equity securities to TSIH. As such, once these remaining shares are issued, it is expected this entity will become dormant going forward.

Sunflower Artificial Intelligence Technologies. Based out of Poland, this entity acted as the contracting entity for development contractors in Poland and Central Europe but is now being dissolved as the contractors have entered into direct contracts with T Stamp Inc.

Trusted Mail Inc. The developer of an encrypted e-mail product (Trusted Mail ®) using our Company’s facial recognition technology. The Trusted Mail technology is held by Trusted Mail, Inc., which is our majority-owned subsidiary.

Biometric Innovations Limited (formerly “Trust Stamp Fintech Limited”). Biometric Innovations is our Company’s United Kingdom operating subsidiary. It was established to act as the contracting entity for development contractors in the UK, and has its own board and management team. The purpose of this entity was to establish beachhead operations in the country in order to service a contract entered by the Company with the National Association of Realtors and Property Mark. This entity serves as a sales and marketing function for the product “NAEA” which was developed for the contract between the listed parties. On June 11, 2020, the Company entered into a stock exchange transaction with Biometric Innovations Limited, becoming a 100% owner of the entity. The stock exchange transaction was not pursuant to any formal written agreement.

Trust Stamp Cayman. Trust Stamp Cayman was established with the intention of taking advantage of enterprise grants which were offered by the Cayman National Government’s Enterprise Zone. No operations have been established at this entity as of the date of this report.

Trust Stamp Malta Limited. Trust Stamp Malta Limited is a wholly owned subsidiary of T Stamp Inc. It operates an R&D Campus in the Republic of Malta, for which it has entered into a lease with a local commercial landlord in Malta, Vassallo Group Realty Ltd. The goal of Trust Stamp Malta Limited is to advance our biometric authentication technology. As part of the creation of this entity, we entered into an agreement with the government of Malta for a potential repayable advance of up to €800,000 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.

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Trust Stamp Rwanda Limited. The Company opened an office in Rwanda, Africa in April 2021 and signed a one-year lease for office space commencing May 1, 2021 The Company has established an R&D center in Rwanda together with a back-office facility for the purpose of our expansion into Africa.

Metapresence Limited. Trust Stamp established Metapresence Limited on November 23, 2021 as a wholly-owned crypto-asset subsidiary in the Isle of Man. Metapresence Limited participates in The Digital Isle of Man Accelerator Program, which provides access to a range of government services including regulatory acceleration support and guided access into the regulatory sandbox, where flexible licensing conditions enable digital asset businesses to explore opportunities and adapt as the technology evolves.

Non-Operational Subsidiaries

AIID Payments Limited. Established by the Company to provide payments services to NGO’s and other non-profit and social-welfare entities and activities. As of the date of this report, the entity has no operations, and is essentially dormant.

T Avatar LLC. Established by the Company to provide anonymized age-verification tools for minors participating in online activities. As of the date of this report, the entity has no operations, and is essentially dormant.

Finnovation LLC. Established by the Company to provide an innovative FinTech, Blockchain and Digital Identity innovation incubator. As of the date of this report, this entity has no operations, and is essentially dormant.

T Stamp LLC. As described above, the Company was originally founded as “T Stamp LLC”, formed on November 9, 2015 as a Georgia limited liability company. In 2016, the Company effected a “hive down” business reorganization whereby the business of the Company was transferred into to a newly formed, wholly owned subsidiary, which was T Stamp Inc. (i.e. the Company). As of the date of this report, the Company is no longer a subsidiary of T Stamp LLC, and T Stamp LLC is no longer a majority owner of the Company. On January 6, 2022 all shares held by T Stamp LLC were distributed to its members on a pro rata basis according to their respective membership interests. As such, as of the date of this report, the entity has no operations, and is essentially dormant.

Available Information

Our website is www.truststamp.ai. Available on this website, free of charge, are our annual reports, quarterly reports, and current reports on form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.

Alternatively, you may access these reports at the SEC’s website at www.sec.gov.

Item 1A. Risk Factors.

The SEC requires the Company to identify risks that are specific to its business and its financial condition. The Company is still subject to all the same risks that all companies in its business, and all companies in the economy, are exposed to. These include risks relating to economic downturns, political and economic events, and technological developments (such as cyber-attacks and the ability to prevent such attacks). Additionally, early-stage companies are inherently riskier than more developed companies, and the risk of business failure and complete loss of your investment capital is present. You should consider general risks as well as specific risks when deciding whether to invest.

Below is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:

o We are a comparatively early-stage company that has incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.
o Our technology continues to be developed, and there is no guarantee that we will ever successfully develop the technology that is essential to our business to a point at which no further development is needed.
o We may be subject to numerous data protection requirements and regulations.

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o We operate in a highly competitive industry that is dominated by a number of exceptionally large, well-capitalized market leaders and the size and resources of some of our competitors may allow them to compete more effectively than we can.
o We rely on third parties to provide services essential to the success of our business.
o We currently have four customers that account for substantially all of our revenues.
o We expect to raise additional capital through equity and/or debt offerings to support our working capital requirements and operating losses.
o The Company is controlled by its officers and directors.
o This investment is illiquid.
o The auditor included a “Emphasis of Matter Regarding Liquidity” note in its audit report for the fiscal years ended December 31, 2021 and 2020.
o The impact of COVID-19 may affect consumer behavior in ways that we cannot accurately predict, and may negatively affect our results of operations.
o We are subject to risks relating to foreign currency fluctuations.

Risks Related to Our Company

We have a limited operating history upon which you can evaluate our performance and have not yet generated profits. Accordingly, our prospects must be considered in light of the risks that any new company encounters. Our Company was incorporated under the laws of the State of Delaware on April 11, 2016, and we have not yet generated profits. The likelihood of our creation of a viable business must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the growth of a business, operation in a competitive industry, and the continued development of our technology and products. We anticipate that our operating expenses will increase for the near future, and there is no assurance that we will be profitable in the near future. You should consider our business, operations, and prospects in light of the risks, expenses and challenges faced as an emerging growth company.

We have historically operated at a loss, which has resulted in an accumulated deficit. For the fiscal year ended December 31, 2021, we incurred a net loss of $9.1 million, compared to a net loss of $10.7 million for the fiscal year ended December 31, 2020. There can be no assurance that we will ever achieve profitability. Even if we do, there can be no assurance that we will be able to maintain or increase profitability on a quarterly or annual basis. Failure to do so would continue to have a material adverse effect on our accumulated deficit, would affect our cash flows, would affect our efforts to raise capital and is likely to result in a decline in our Class A Common Stock price.

Our consolidated financial statements for the fiscal years ended December 31, 2021 and 2020 have been prepared on a going concern basis. We have not yet generated profits and have an accumulated deficit of $27.2 million as of December 31, 2021, compared to an accumulated deficit of $18.2 million as of December 31, 2020. We may not have enough funds to sustain the business until it becomes profitable. Even if we raise additional funding through future financing efforts, we may not accurately anticipate how quickly we may use such funds and whether such funds would be sufficient to bring the business to profitability.

Our technology continues to be developed, and it is unlikely that we will ever develop our technology to a point at which no further development is required. Trust Stamp is developing complex technology that requires significant technical and regulatory expertise to develop, commercialize and update to meet evolving market and regulatory requirements. If we are unable to successfully develop and commercialize our technology and products, it will significantly affect our viability as a company.

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If our security measures are breached or unauthorized access to individually identifiable biometric or other personally identifiable information is otherwise obtained, our reputation may be harmed, and we may incur significant liabilities. In the ordinary course of our business, we may collect and store sensitive data, including protected health information (“PHI”), personally identifiable information (“PII”), owned or controlled by ourselves or our customers, and other parties. We communicate sensitive data, including patient data, electronically, and through relationships with multiple third-party vendors and their subcontractors. These applications and data encompass a wide variety of business-critical information, including research and development information, patient data, commercial information, and business and financial information. We face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate use or disclosure, inappropriate modification, and the risk of our being unable to adequately monitor, audit, and modify our controls over our critical information. This risk extends to the third-party vendors and subcontractors we use to manage this sensitive data. As a custodian of this data, Trust Stamp therefore inherits responsibilities related to this data, exposing itself to potential threats. Data breaches occur at all levels of corporate sophistication (including at companies with significantly greater resources and security measures than our own) and the resulting fallout stemming from these breaches can be costly, time-consuming, and damaging to a company’s reputation. Further, data breaches need not occur from malicious attack or phishing only. Often, employee carelessness can result in sharing PII with a much wider audience than intended. Consequences of such data breaches could result in fines, litigation expenses, costs of implementing better systems, and the damage of negative publicity, all of which could have a material adverse effect on our business operations and financial condition.

We are subject to substantial governmental regulation relating to our technology and will continue to be for the lifetime of our Company. By virtue of handling sensitive PII and biometric data, we are subject to numerous statutes related to data privacy and additional legislation and regulation should be anticipated in every jurisdiction in which we operate. Examples of federal (US) and European statutes we could be subject to are:

o Health Insurance Portability and Accountability Act (HIPAA)
o Health Information Technology for Economic and Clinical Health Act (HITECH)

Any such access, breach, or other loss of information could result in legal claims or proceedings, liability under federal or state laws that protect the privacy of personal information under HIPAA and/or “HITECH”. Notice of breaches must be made to affected individuals, the Secretary of the Department of Health and Human Services (“HHS”), and for extensive breaches, notice may need to be made to the media or state attorneys general. Penalties for violations of these laws vary. For instance, penalties for failure to comply with a requirement of HIPAA and HITECH vary significantly, and include significant civil monetary penalties and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer or use identifiable health information for commercial advantage, personal gain, or malicious harm.

Further, various states, such as California, have implemented similar privacy laws and regulations, such as the California Confidentiality of Medical Information Act, that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. Where state laws are more protective, we have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. The interplay of federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and data we receive, use and share, potentially exposing us to additional expense, adverse publicity, and liability. Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as PII or PHI, along with increased customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our services, decrease demand for our services, reduce our revenues and/or subject us to additional liabilities.

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Compliance with U.S. and international data protection laws and regulations could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. Moreover, complying with these various laws could require us to take on more onerous obligations in our contracts, restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions. We rely on our customers to obtain valid and appropriate consents from data subjects whose biometric samples and data we process on such customers’ behalf. Given that we do not obtain direct consent from such data subjects and we do not audit our customers to ensure that they have obtained the necessary consents required by law, the failure of our customers to obtain consents that are in compliance with applicable law could result in our own non-compliance with privacy laws. Such failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business. Claims that we have violated individuals’ privacy rights, failed to comply with data protection laws, or breached our contractual obligations, even if we are not found liable, could be expensive and time consuming to defend, could result in adverse publicity and could have a material adverse effect on our business, financial condition and results of operations.

We anticipate sustaining operating losses for the foreseeable future. It is anticipated that we will sustain operating losses into 2022 as we continue to expand our team, continue with research and development, and strive to gain customers for our technology and gain market share in our industry. Our ability to become profitable depends on our ability to expand our customer base, consisting of companies willing to license our technology. There can be no assurance that this will occur. Unanticipated problems and expenses are often encountered in offering new products which may impact whether the Company is successful. Furthermore, we may encounter substantial delays and unexpected expenses related to development, technological changes, marketing, regulatory requirements and changes to such requirements or other unforeseen difficulties. There can be no assurance that we will ever become profitable. If the Company sustains losses over an extended period of time, it may be unable to continue in business.

If our products do not achieve broad acceptance both domestically and internationally, we will not be able to achieve our anticipated level of growth. Our revenues are derived from licensing our identity authentication solutions. We cannot accurately predict the future growth rate or the size of the market for our technology. The expansion of the market for our solutions depends on a number of factors, such as

the cost, performance and reliability of our solutions and the products and services offered by our competitors;
customers’ perceptions regarding the benefits of biometrics and other authentication solutions;
public perceptions regarding the intrusiveness of these solutions and the manner in which organizations use biometric and other identity information collected;
public perceptions regarding the confidentiality of private information;
proposed or enacted legislation related to privacy of information
customers’ satisfaction with biometrics solutions; and
marketing efforts and publicity regarding biometrics solutions.

Even if our technology gains wide market acceptance, our solutions may not adequately address market requirements and may not continue to gain market acceptance. If authentication solutions generally or our solutions specifically do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth and our revenues and results of operations would suffer.

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We operate in a highly competitive industry that is dominated by multiple very large, well-capitalized market leaders and is constantly evolving. New entrants to the market, existing competitor actions, or other changes in market dynamics could adversely impact us. The level of competition in the identity authentication industry is high, with multiple exceptionally large, well-capitalized competitors holding a majority share of the market. Currently, we are not aware of any direct competitors of the Company able to offer our main technological offering. Nonetheless, many of the companies in the identity authentication market have longer operating histories, larger customer bases, significantly greater financial, technological, sales, marketing, and other resources than we do. At any point, these companies may decide to devote their resources to creating a competing technology solution which will impact our ability to maintain or gain market share in this industry. Further, such companies will be able to respond more quickly than we can to new or changing opportunities, technologies, standards, or client requirements, more quickly develop new products or devote greater resources to the promotion and sale of their products and services than we can. Likewise, their greater capabilities in these areas may enable them to better withstand periodic downturns in the identity management solutions industry and compete more effectively on the basis of price and production. In addition, new companies may enter the markets in which we compete, further increasing competition in the identity management solutions industry.

We believe that our ability to compete successfully depends on a number of factors, including the type and quality of our products and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully against current or future competitors, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products, any of which would adversely impact our results of operations and financial condition.

We face competition from companies with greater financial, technical, sales, marketing, and other resources, and, if we are unable to compete effectively with these competitors, our market share may decline, and our business could be harmed. We face competition from well established companies. Many of our competitors have longer operating histories, larger customer bases, significantly greater financial, technological, sales, marketing, and other resources than we do. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards, or client requirements, more quickly develop new products or devote greater resources to the promotion and sale of their products and services than we can. Likewise, their greater capabilities in these areas may enable them to better withstand periodic downturns in the identity management solutions industry and compete more effectively on the basis of price and production. In addition, new companies may enter the markets in which we compete, further increasing competition in the identity management solutions industry.

We believe that our ability to compete successfully depends on a number of factors, including the type and quality of our products and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully against current or future competitors, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products, any of which would adversely impact our results of operations and financial condition.

The Company may be unable to effectively protect its intellectual property. To date, the Company has been issued eleven patents related to its products and technology. The Company has many more pending patent applications as of the date of this report. There is no guarantee that the Company will ever be issued patents on the applications it has submitted. In addition, in order to control costs, we have filed patent applications only in the United States. This may result in our having limited or no protection in other jurisdictions. Our success depends to a significant degree upon the protection of our products and technology. If we are unable to secure patents for our products and technology, or are otherwise are unsuccessful at protecting our technology, other companies with greater resources may copy our technology and/or products, or improve upon them, putting us at a disadvantage to our competitors.

Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products. We believe our products and technology may be highly disruptive to a very large and growing market. Our competitors are well capitalized with significant intellectual property protection and resources and they (and/or patent trolls) may initiate infringement lawsuits against our Company. Such litigation could be expensive and could also prevent us from selling our products, which would significantly harm our ability to grow our business as planned.

Our failure to attract and retain highly qualified personnel in the future could harm our business. As the Company grows, it will be required to hire and attract additional qualified professionals, additional staff for research and development, regulatory professionals, sales and marketing professionals, accounting, legal, and finance experts. The Company may not be able to locate or attract qualified individuals for such positions, which will affect the Company’s ability to grow and expand its business.

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We rely on third party service providersOur third-party partners provide a variety of essential business functions, including distribution, manufacturing, and many others. It is possible that some of these third parties will fail to perform their services or will perform them in an unacceptable manner. If we encounter problems with one or more of these parties and they fail to perform to expectations, it could have a material adverse impact on the Company.

We currently have four customers that account for substantially all of our revenuesDuring the Company’s development, we have focused on developing relationships with a few partners and customers. As such, our historical financial results identify that we generated substantially all of our revenue from two customers – which relatively recently has increased to four. In total, Trust Stamp increased the concentration of non-affiliated customers generating significant revenue from 3 customers in the year ended December 31, 2020 to 6 customers in the year ended December 31, 2021. As we grow, we intend to expand the number of customers from which we generate revenues. In the opinion of our management, we would be able to continue operations without our current customers. However, the unanticipated loss of the Company’s current customers could have an adverse effect on the company’s financial position.

Our future success is dependent on the continued service of our small management team. Eight directors and four executive officers provide leadership to Trust Stamp. Two of the directors are also executive officers. Our success is dependent on their ability to manage all aspects of our business effectively. Because we are relying on our small management team, we lack certain business development resources that may hurt our ability to grow our business. Although we are currently growing our board and management team, there is no guarantee that newly added board and management team members will contribute to Trust Stamp as we hope. Any loss of key members of our executive team could have a negative impact on our ability to manage and grow our business effectively. We do not maintain a key person life insurance policy on any of the members of our senior management team. As a result, we would have no way to cover the financial loss if we were to lose the services of our directors or officers.

We expect to raise additional capital through equity and/or debt offerings to support our working capital requirements and operating losses. In order to fund future growth and development, the Company will likely need to raise additional funds in the future by offering shares of its Common or Preferred Stock and/or other classes of equity, or debt that convert into shares of common or Preferred Stock, any of which offerings would dilute the ownership percentage of investors in this report. See “Dilution”. In order to issue sufficient shares in this regard, we may be required to amend our certificate of incorporation to increase our authorized capital stock, which would be require us to obtain a consent of a majority of our shareholders. Furthermore, if the Company raises capital through debt, the holders of our debt would have priority over holders of common and Preferred Stock and the Company may be required to accept terms that restrict its ability to incur more debt. We cannot assure you that the necessary funds will be available on a timely basis, on favorable terms, or at all, or that such funds if raised, would be sufficient. The level and timing of future expenditure will depend on a number of factors, many of which are outside our control. If we are not able to obtain additional capital on acceptable terms, or at all, we may be forced to curtail or abandon our growth plans, which could adversely impact the Company, its business, development, financial condition, operating results, or prospects.

We are and may continue to be significantly impacted by the worldwide economic downturn due to the COVID-19 pandemic. In December 2019, a novel strain of coronavirus, or COVID-19, was reported to have surfaced in Wuhan, China. COVID-19 has spread to many countries, including the United States, and was declared to be a pandemic by the World Health Organization. Efforts to contain the spread of COVID-19 have intensified and the U.S., Europe and Asia have implemented severe travel restrictions and social distancing. The impacts of the outbreak are unknown and rapidly evolving. A widespread health crisis has adversely affected and could continue to affect the global economy, resulting in an economic downturn that could negatively impact the operations of the Company, which could negatively impact your investment in our securities.

The continued spread of COVID-19 has also led to severe disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future. It is possible that the continued spread of COVID-19 could cause a further economic slowdown or recession or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

The extent to which COVID-19 affects our financial results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 outbreak and the actions to contain the outbreak or treat its impact, among others. Moreover, the COVID-19 outbreak has had and may continue to have indeterminable adverse effects on general commercial activity and the world economy, and our business and results of operations could be adversely affected to the extent that COVID-19 or any other pandemic harms the global economy generally.

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We are subject to risks related foreign currency exchange rates. We operate on a global basis. We have operations (through our subsidiaries and/or directly) in many foreign countries and territories, including, but not limited to, Great Britain, Poland, Rwanda, and the Republic of Malta. The translation from any currencies to United States Dollars for financial statement presentation resulted in a foreign currency loss of $159,270 for the year ended December 31, 2021, and $81,137 gain for the year ended December 31, 2020, but it could lead to a loss in the future. Such foreign currency translation losses could have a material adverse effect on our business.

We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies could make our Class A Common Stock less attractive to investors. We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS) Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved, and an exemption from compliance with the requirement of the PCAOB regarding the communication of critical audit matters in the auditor’s report on the financial statements. We could be an emerging growth company for up to five years following the year in which we completed our IPO, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the closing of our IPO, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that are held by non-affiliates to exceed $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We cannot predict if investors will find our Class A Common Stock less attractive because we may rely on the reporting exemptions and the extended transition period for complying with new or revised accounting standards. If some investors find our Class A Common Stock less attractive as a result, there may be a less active trading market for our Class A Common Stock and our share price may be more volatile.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

The Company contracts for use of office space at 3017 Bolling Way NE, Floors 1 and 2, Atlanta, Georgia, 30305, United States of America, which serves as its corporate headquarters and primary operational hub. The Company also leases office space (through a subsidiary) in Malta, which primarily serves as a research and development space. The Company contracts for coworking arrangements in other office spaces (either directly or through its subsidiaries) in New York, North Carolina, Cheltenham, the UK and Rwanda, Africa to support its dispersed workforce. Minimum lease commitments related to these agreements are described in Note 14 to the consolidated financial statements provided under Item 8 of this report.

Item 3. Legal Proceedings

From time to time, the Company may be involved in a variety of legal matters that arise in the normal course of business. The Company is not currently involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of its business activities, or otherwise. See “Risk Factors” for a summary of risks our Company may face in relation to litigation against our Company.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock

During the years ended December 31, 2021 and December 30, 2020, our Class A Common Stock was traded on the OTC Markets Group Inc.’s OTCQX quotation platform under the trading symbol “IDAI” and on the Euronext Growth market in Dublin under “AIID”. However, Trust Stamp received approval from Nasdaq to have our Class A Common Stock listed on the Nasdaq Capital Market under the symbol “IDAI” with trading commencing on January 31, 2022. As a result of our Nasdaq approval, our Class A Common Stock is no longer listed on the OTCQX market as of January 31, 2022.

Holders

As of April 6, 2022, there were approximately 3,009 registered holders of record of our Class A Common Stock and the last reported sale price of our Class A Common Stock on the Nasdaq was $2.20 per share on April 5, 2022.

The number of shares of our Class A Common Stock that are freely tradeable as of April 6, 2022 was 9,743,010.

The following table sets forth, for the periods indicated the high and low bid quotations for our Class A Common Stock on OTCQX. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions.

Period

    

    

Fiscal Year 2021

High**

Low**

First Quarter (January 1, 2021* – March 31, 2021)

$

5.00

$

2.00

Second Quarter (April 1, 2021 – June 30, 2021)

$

4.40

$

2.50

Third Quarter (July 1, 2021 – September 30, 2021)

$

4.94

$

1.01

Fourth Quarter (October 1, 2021 – December 31, 2021)

$

9.00

$

3.35

*The Company was initially quoted on OTCQX on February 24, 2021.

**On August 18, 2021, by written consent of the stockholders, the Company effected a 5-for-1 forward stock split. The prices listed in the table above have been retroactively restated to reflect the stock split. The stock split was effective for trading on the market opening of both Euronext Growth and OTCQX on August 23, 2021.

Euronext Growth Dublin (Ticker code: “AIID”).

On December 8, 2020, Trust Stamp was listed on Euronext Growth Dublin through the admission to trading of 17,943,255 shares under a direct listing. The admission and issue price of our Class A Common Stock was set at $1.56 per share.

The last reported sale price of our Class A Common Stock on the Euronext Growth Dublin on May 7, 2021 was $3.80 per share.

The following table sets forth, for the periods indicated the high and low bid quotations for our Class A Common Stock on Euronext Growth Dublin. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions.

Period

    

    

Fiscal Year 2021

High*

Low*

First Quarter (January 1, 2021 – March 31, 2021)

$

1.56

$

1.56

Second Quarter (April 1, 2021 – June 30, 2021)

$

3.80

$

1.56

Third Quarter (July 1, 2021 – September 30, 2021)

$

3.80

$

3.80

Fourth Quarter (October 1, 2021 – December 31, 2021)

$

3.80

$

3.80

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Period

Fiscal Year 2020

    

High*

    

Low*

Fourth Quarter (December 8, 2020 – December 31, 2020)

 

$

1.56

 

$

1.56

*On August 18, 2021, by written consent of the stockholders, the Company effected a 5-for-1 forward stock split. The prices listed in the table above have been retroactively restated to reflect the stock split. The stock split was effective for trading on the market opening of both Euronext Growth and OTCQX on August 23, 2021.

Performance Graph

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

Dividend Policy

To date, we have not paid any dividends on our Class A Common Stock and do not anticipate paying any dividends in the foreseeable future. The declaration and payment of dividends on the Class A Common Stock is at the discretion of our Board of Directors and will depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our Board of Directors may deem relevant. We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying dividends on our Class A Common Stock in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

On April 9, 2019, management created a new entity, TStamp Incentive Holdings (“TSIH”) to which the Company issued 1,620,565 shares of Class A Common Stock that the Board of Directors of TSIH could use for employee stock awards in the future. As of December 31, 2020, 282,565 of these shares were outstanding, and 282,565 remained available for issuance. The purpose of the entity was to provide an analogous structure to a traditional stock incentive plan. Any equity compensation approved by the Company would be issued by TSIH. As of the date of this report, 282,565 shares of Class A Common Stock are still held by TSIH – however, all of these shares of Class A Common Stock have been allocated for issuance pursuant to RSUs that vested on January 2, 2022. The Company has no plans to issue additional equity securities to TSIH. As such, once these remaining shares are issued, it is expected this entity will become dormant going forward.

The Company expects to adopt another equity compensation plan in the near future, but has not yet done so as of the date of this report.

Executive Compensation Philosophy

Our Board of Directors determines the compensation given to our executive officers in their sole discretion. Our Board of Directors reserves the right to pay our executives or any future executives a salary, and/or issue them shares of Class A Common Stock issued in consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance. This package may also include long-term stock-based compensation to certain executives, which is intended to align the performance of our executives with our long-term business strategies. Additionally, the Board of Directors has granted and reserves the right to grant performance-based equity awards in the future, if the Board of Directors in its sole determination believes such grants would be in our best interests.

Incentive Bonus

The Board of Directors may grant incentive bonuses to our executive officers and/or future executive officers in its sole discretion, if the Board of Directors believes such bonuses are in our best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.

25

Long-Term, Stock Based Compensation

In order to attract, retain and motivate executive talent necessary to support our long-term business strategy we may award our executives and any future executives with long-term, stock-based compensation in the future, at the sole discretion of our Board of Directors.

Recent Sales of Unregistered Securities:

    

    

    

Number of

    

    

    

    

Date Closed

Offering

Date

shares

Class of

Proceeds

Use of

(if Open,

Type

Intermediary

Commenced

issued

Securities

Raised

Proceeds

N/A)

2020 Reg A

SI Securities LLC

5/5/2020

1,264,452

Series A Preferred Stock

$8.4 million

Product development, marketing, and working capital

7/17/2020

2021 Reg D

n/a

3/12/2021

1,301,225

Class A Common Stock

$4.0 million

Product development, marketing, and working capital

6/4/2021

2021 Reg CF

 

Dalmore Group LLC

 

8/25/2021

 

1,137,975

 

Units of Class A Common Stock and Warrants to acquire Class A Common Stock

$4.6 million

 

Product development, marketing, and working capital

 

2/18/2022

2021 Reg D

 

n/a

 

8/25/2021

 

240,989

 

Units of Class A Common Stock and Warrants to acquire Class A Common Stock

$1.0 million

 

Product development, marketing, and working capital

 

2/1/2022

2021 Reg S

 

n/a

 

8/25/2021

 

56,104

 

Units of Class A Common Stock and Warrants to acquire Class A Common Stock

$0.2 million

 

Product development, marketing, and working capital

 

1/7/2022

Item 6. Selected Financial Data

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.

26

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

T Stamp Inc. was incorporated on April 11, 2016 in the State of Delaware. T Stamp Inc. and its subsidiaries (collectively (unless context indicates otherwise) “Trust Stamp”, “We”, or the “Company”) develops and markets identity authentication software solutions for government and enterprise partners and peer-to-peer markets.

Trust Stamp develops proprietary artificial intelligence powered solutions; researching and leveraging cutting edge technology including biometric science, cryptography, and data mining to deliver insightful identity and trust predictions while protecting the user’s privacy and identifying and defending against fraudulent identity attacks. We utilize the cutting-edge power and agility of technologies such as GPU processing, neural networks and edge computing to process data faster and more effectively than has ever previously been possible as well as delivering results at a disruptively low cost for usage across multiple industries, including

Banking/FinTech
Humanitarian and Development Services
Biometrically Secured Email
KYC/AML Compliance
Government and Law Enforcement
P2P Transactions, Social Media, and Sharing Economy
Real Estate, Travel and Healthcare

During the year ended December 31, 2021, Trust Stamp continued the diversification of our customer network while maintaining service agreements for our three largest clients, U.S. Immigration and Customs Enforcement (“ICE”), a SP500 bank, and Mastercard, which made up 91% of total revenue during the year ended December 31, 2021 compared to 64% of total revenue during the year ended December 31, 2020. Simultaneously, we increased focus on expanding our marketing efforts in the U.S., U.K., E.U., and Africa to recruit new clients including new vertical engagements with the travel and insurance industries. Our most recent investments include the openings of new offices and the addition of staff in the British Isles, Rwanda, and Malta.

On February 23, 2021, we completed the acquisition of Pixelpin in exchange for $91 thousand of cash. Pixelpin is an image-based “Pin-on-Glass” account access solution that alleviates pain-points of traditional login methods while ensuring the security of authentication. This acquisition further enhances Trust Stamp’s innovative portfolio of technology solutions that enable improved customer experiences and reputation while broadening the scope of internal risk-management strategies and providing additional options for multi-factor authentication.

Our investment in business development generated a growing component of Trust Stamp’s revenue during the year ended December 31, 2021 and has led to a number of engagements with significant clients for proof-of-concept deliveries and new product sales, laying a solid foundation to grow future revenue including annual recurring revenue from access and usage fees.

Our Customers and Business

Trust Stamp increased the concentration of non-affiliated clients generating significant revenue from 3 customers in the year ended December 31, 2020 to 6 customers in the year ended December 31, 2021, with further client-revenue growth achieved and anticipated in 2022.

27

It was publicly announced in September 2021 that Mastercard’s Community Pass is being implemented for a project between Mastercard and Paycode, with a goal of servicing 30 million customers that are underserved and unbanked in Africa. Given that Trust Stamp’s IT2 and Facial Recognition technologies are utilized within the Mastercard Community Pass platform on a pay-per-use basis, it is anticipated that the implementation will generate substantial pay-per-use revenue over and above guaranteed minimum revenue under the software agreement.

In 2021, we pursued the award of a significant contract with the ICE which required an investment in productization, business development and satisfying extensive due diligence processes. The $3,920,764 contract was awarded September 23, 2021 for commencement of services on September 27, 2021. The Company is performing its obligations under this contract as of the date of this report and during the year ended December 31, 2021 recognized $1.7 million in net sales related to this agreement. Alongside the revenue implications of this specific contract, it is believed that a successful execution will lead to extended and additional contracts of the same nature in addition to increasing Trust Stamp’s corporate visibility, reputation, and trust in associated markets.

Trust Stamp continues to expand a robust sales pipeline in the Company’s key markets and the velocity of pipeline growth has increased in 2021. Our pipeline included 55 potential revenue contracts and projects as of December 31, 2021.

During the year ended December 31, 2021, the Company contracted with a third-party software developer to meet the need for additional research and development resources over and above internal resources.

During the year ended December 31, 2021, the cost of those services was the largest single expense other than internal employment costs. We have continued scaling our development team in Malta and have established a new development team in Rwanda. The expansion of our internal development teams has required additional hiring, onboarding, training and equipment costs in 2021 but will going forward allow us to substantially increase the percentage of contracts that are serviced internally with an estimated 60% reduction in our per-hour development costs versus contracted services.

Trust Stamp’s key sub-markets are identity authentication for the purpose of account opening, access and fraud detection and the creation of tokenized identities to facilitate financial & societal inclusion.

Key Business Measure

In addition to the measures presented in our consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions.

Adjusted EBITDA

This discussion includes information about Adjusted EBITDA that is not prepared in accordance with U.S. GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by U.S. GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.

Adjusted EBITDA is a non-GAAP financial measure that represents U.S. GAAP net income (loss) adjusted to exclude (1) interest expense, (2) interest income, (3) provision for income taxes, (4) depreciation and amortization, (5) changes in assets and liabilities, and (6) certain other items management believes affect the comparability of operating results.

Management believes that Adjusted EBITDA, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our Company and our management, and it will be a focus as we invest in and grow the business.

28

Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:

o Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments.
o Adjusted EBITDA does not reflect changes in, or cash requirements for our working capital needs;
o Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
o Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations.

Due to these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplement to our U.S. GAAP results.

Reconciliation of Net Loss to Adjusted EBITDA

    

For the years ended December 31,

2021

2020

Net loss before taxes

$

(9,058,906)

$

(10,683,624)

Add: Other expense

 

159,533

 

Less: Other income

(56,932)

(81,137)

Less: Grant income

(61,601)

(189,507)

Add: Interest expense (income)

 

39,970

 

182,794

Add: Warrant expense

 

 

1,413,273

Add: Stock-based compensation

 

2,780,639

 

2,517,555

Add: Impairment of investment in related party

 

 

962,000

Add: Non-cash expenses for in-kind services

 

261,794

 

93,100

Add: Depreciation and amortization

 

573,755

 

406,241

Adjusted EBITDA loss (non-GAAP)

$

(5,361,748)

$

(5,379,305)

Adjusted EBITDA (non-GAAP) loss for the year ended December 31, 2021, decreased by 0.33%, to $5.36 million from $5.38 million for the year ended December 31, 2020. The overall increase/decrease in adjusted EBITDA loss was driven primarily by a $1.40 million increase in gross margin during the year ended December 31, 2021, offset by an increase in selling, general and administrative expenses of $1.94 million during the year ended December 31, 2021. See “Results of Operations” below for further discussion on the drivers behind the increase in gross margin and selling, general and administrative expenses during the year ended December 31, 2021.

Gross sales (non-GAAP)

This discussion includes information about gross sales hat is not prepared in accordance with U.S. GAAP. Gross sales is not based on any standardized methodology prescribed by U.S. GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.

29

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

    

For the year ended December 31,

2021

2020

Net sales

$

3,677,896

$

2,648,322

Add back:

 

 

Third party costs accrued and rebilled to clients

 

348,642

 

224,020

Gross sales (non-GAAP)

$

4,026,538

$

2,872,342

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

Key Business Measures

    

For the three-months ended

    

For the year ended

 

December 31, 2021

December 31, 2021

Amount

Margin

Amount

Margin

 

Net sales

$

2,096,100

 

100.00

%  

$

3,677,896

 

100.00

%

Growth compared to prior year period

 

69.71

%  

 

38.88

%  

Loss from operations

$

(1,966,840)

 

(93.83)

%

$

(8,890,992)

 

(241.74)

%

Adjusted loss from operations (non-GAAP)

 

(580,179)

 

(27.68)

%

 

(5,274,804)

 

(143.42)

%

Adjusted free cash flow (non-GAAP)

 

(1,580,424)

 

(75.40)

%

 

(7,482,827)

 

(203.45)

%

Net loss

 

(2,023,781)

 

(96.55)

%

 

(9,058,906)

 

(246.31)

%

Adjusted EBITDA (non-GAAP)

 

(612,751)

 

(29.23)

%

 

(5,361,748)

 

(145.78)

%

Adjusted EBITDA per share, diluted (non-GAAP)

(0.03)

(0.28)

GAAP net loss per share, diluted

 

(0.10)

 

 

(0.48)

 

Net sales for the three months ended December 31, 2021 made up 56.99% of total net sales recognized for the year ended December 31, 2021. This uptick in the fourth quarter is primarily attributable to $1.68 million of recognized revenue from the new $3.92 million ICE contract entered into in September 2021 with an initial term of 6 months. Further, during the fourth quarter ended December 31, 2021, the percentage of revenue associated with our other Key Business Measures (loss from operations, adjusted free cash flow, net loss, adjusted EBITDA, adjusted EBITDA per share, diluted, and net loss per share, diluted) has significantly decreased when compared to the year ended December 31, 2021. The sharp improvement in these margins is primarily attributable to the cost margins associated with the ICE contract being much lower than those associated with the majority of our other revenue agreements. This is indicative of the Company’s transition to lower cost margin contracts which involve semi-customized solutions versus semi-customized solutions which are implemented using semi-customized existing internal-use software.

Adjusted Loss from Operations and Adjusted Operating Margin

    

For the three-months ended

    

For the year ended

December 31, 2021

December 31, 2021

Loss from operations

$

(1,966,840)

 

$

(8,890,992)

Add: Depreciation and amortization

 

151,028

 

573,755

Add: Non-cash expenses for in-kind services

177,930

 

261,794

Add: Stock-based compensation

1,057,703

2,780,639

Adjusted loss from operations

$

(580,179)

$

(5,274,804)

Adjusted operating margin

(27.68)

%

(143.42)

%

30

Adjusted Free Cash Flow

    

For the three-months ended

    

For the year ended

 

December 31, 2021

December 31, 2021

Net cash provided by operating activities

 

$

(1,444,016)

 

$

(6,714,474)

Less: purchases of property, plant and equipment

 

(316)

 

(34,217)

Less: acquisition of intangible assets

 

 

(90,621)

Less: internally developed software

 

(113,576)

 

(482,219)

Less: acquisition of patents

 

(22,516)

 

(161,296)

Adjusted free cash flow

 

$

(1,580,424)

 

$

(7,482,827)

Adjusted free cash flow margin

 

(75.40)

%

(203.45)

%

Adjusted free cash flow margin improved from 203.45% for the year ended December 31, 2021 to 75.40% for the quarter ended December 31, 2021. This improvement is primarily attributable to the margin generated on the new ICE revenue contract, which had services commence during the fourth quarter of 2021. The recognized margin associated with this contract during the fourth quarter was $1.59 million, or 95%, which is significantly higher than our gross margin during the year ended December 31, 2021 of $2.53 million, or 69%.

Adjusted EBITDA

For the three-months ended

For the year ended

    

December 31, 2021

    

December 31, 2021

Net loss before taxes

$

(2,023,781)

 

$

(9,058,906)

Add: Other expense

 

74,316

 

159,533

Less: Other income

 

(46,067)

 

(56,932)

Less: Grant income

 

 

(61,601)

Add: Interest expense (income)

 

(3,880)

 

39,970

Add: Non-cash expenses for in-kind services

 

177,930

 

261,794

Add: Depreciation and amortization

 

151,028

 

573,755

Add: Stock-based compensation

 

1,057,703

 

2,780,639

Adjusted EBITDA

$

(612,751)

 

$

(5,361,748)

Adjusted EBITDA margin

 

(29.23)

%  

(145.78)

%

Adjusted EBITDA margin improved from 145.78% for the year ended December 31, 2021 to 29.23% for the quarter ended December 31, 2021. This margin improvement is primarily attributable to margin generated on the new ICE revenue contract, which had services commenced during the fourth quarter of 2021.

Adjusted EBITDA per Share, Diluted

    

For the three-months ended

    

For the year ended

December 31, 2021

December 31, 2021

Adjusted EBITDA

$

(612,751)

$

(5,361,748)

Weighted average shares of common stock outstanding

 

19,783,165

 

18,837,358

Adjusted EBITDA per share, diluted

$

(0.03)

$

(0.28)

Components of Results of Operations

Net sales

We derive our revenue primarily from professional services. Most of the revenue is derived from the contract with ICE which amounts to $1.7 million for the year ended December 31, 2021.

31

Cost of services provided

Cost of services provided generally consists of the cost of hosting fees and cost of labor associated with professional services rendered. Depreciation and amortization expense is not included in cost of services provided.

Further, several projects that were originally in the research and development stage became feasible projects, shifting the allocation of cost from research and development into cost of services provided in the current year as client specific products were implemented using the technologies. This increase of expense allocation is a result of our prior decision to invest more money in research and development in prior periods and our goal of accelerating our product roadmap coming to fruition.

We expect that cost of services provided will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue.

Research and development

Research and development expenses (“R&D”) consist primarily of personnel costs, including salaries and benefits. Personnel costs are allocated to R&D for time spent working on the preliminary project stage and post-implementation maintenance as well as time spent on bug fixes associated with internal-use software activities, front-end application development in which technological feasibility has not been established, and services rendered to customers under funded software-development arrangements.

We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities.

Selling, general, and administrative

Selling, general, and administrative (“SG&A”) expenses were generally composed of payroll, legal, and professional fees, including an increase in sales commission expense incurred because of new statements of work.

We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers, in growing our business and enhancing our brand awareness.

Depreciation and amortization

The increase in depreciation and amortization is primarily due to a continued investment in internally developed software which will be used for future productization.

Interest income (expense)

Interest income (expense) consists primarily of interest expense accrued on a promissory notes payable. Additionally, the Company earned interest income in the form of cash back by using its corporate line of credit.

Warrant expense

The warrant expense relates to the warrants issued during the periods presented. For more information on warrants, see Issuances of Equity, Notes, Warrants and SAFEs section below in the document.

Impairment of investment in related party

The impairment of investment in related party relates to Emergent wherein we were informed in April 2021 that Emergent wound up and ceased operations in December 2020 therefore, the investment was written off as a non-operating expense. We note that all purchase orders related to Emergent were fully delivered prior to it winding up and no further obligation to them exists.

32

Grant income

The Company had grant income primarily related to Trust Stamp Malta’s agreements with Republic of Malta. During July 2020, the Company entered into an agreement with the Republic of Malta that would provide for a grant of up to €200 thousand as reimbursement for operating expenses over the first 12 months following incorporation in the Republic of Malta. The Company was required to provide an initial capital amount of €50 thousand euros, which is matched with a €50 thousand grant.

Other income

Other income is mainly driven by miscellaneous income earned that is unrelated to the main focus of the Company’s business.

Other expense

Other expense is mainly driven by the fact that the Company operates in multiple countries, including the U.K., Malta, and Rwanda, and as such, has certain exchange rate gains and losses associated with converting the foreign currency activity to the Company’s reporting currency, USD.

Results of Operations

The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenue for the years ended December 31, 2021 and 2020:

    

For the years ended December 31

2021

2020

Net sales (1)

$

3,677,896

$

2,648,322

Operating Expenses:

 

 

Cost of services provided (exclusive of depreciation and amortization shown separately below)

 

1,151,057

 

1,520,297

Research and development

 

2,529,501

 

2,742,349

Selling, general, and administrative

 

8,314,575

 

6,375,637

Depreciation and amortization

 

573,755

 

406,240

Total Operating Expenses

 

12,568,888

 

11,044,523

Operating Loss

 

(8,890,992)

 

(8,396,201)

Non-Operating Income (Expense):

 

 

Interest income (expense)

 

(39,970)

 

(182,794)

Change in fair value of warrant liability

 

(86,944)

 

Warrant expense

 

 

(1,413,273)

Impairment of investment in related party

 

 

(962,000)

Grant income

 

61,601

 

189,507

Other income

 

56,932

 

81,137

Other expense

 

(159,533)

 

Total Other Expense, Net

 

(167,914)

 

(2,287,423)

Net Loss before Taxes

 

(9,058,906)

 

(10,683,624)

Income tax expense

 

 

Net loss including noncontrolling interest

 

(9,058,906)

 

(10,683,624)

Net loss attributable to noncontrolling interest

(1,743)

(63)

Net loss attributable to T Stamp Inc.

$

(9,057,163)

$

(10,683,561)

Basic and diluted net loss per share attributable to T Stamp Inc.

$

(0.48)

$

(0.90)

Weighted-average shares used to compute basic and diluted net loss per share

18,837,358

11,817,775

(1)

Includes related party sales of $0 and $905 thousand for the years ended December 31, 2021 and 2020, respectively.

33

Comparison of the Years Ended December 31, 2021 and 2020

The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue:

    

For the years ended December 31,

 

2021

2020

 

Net sales

 

100

%  

100

%

Operating Expenses:

 

 

Cost of services provided (exclusive of depreciation and amortization shown separately below)

 

31

 

57

Research and development

 

69

 

104

Selling, general, and administrative

 

226

 

241

Depreciation and amortization

 

16

 

15

Total Operating Expenses

 

342

 

417

Operating Loss

 

(242)

 

(317)

Non-Operating Income (Expense):

 

 

Interest income (expense)

 

(1)

 

(7)

Change in fair value of warrant liability

 

(2)

 

Warrant expense

 

 

(53)

Impairment of investment in related party

 

 

(36)

Grant income

 

2

 

7

Other income

 

2

 

3

Other expense

 

(4)

 

Total Other Expense, Net

 

(5)

 

(86)

Net Loss before Taxes

 

(246)

 

(403)

Income tax expense

 

Net Loss

(246)

%  

(403)

%

Net sales

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Net sales

$

3,677,896

$

2,648,322

$

1,029,574

 

38.9

%

Net sales increased by $1.03 million, or 38.9%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was driven by revenue contracts executed by newly acquired and existing customers. Total net sales from new revenue contracts signed in 2021 produced $2.51 million, consisting of  $1.68 million from ICE, $211 thousand from an SP500 bank, a statement of work (“SOW”) from Mastercard for $334 thousand, $224 thousand from FIS, and the remaining $61 thousand from various other new SOW.

Additionally, the Company saw large increases in revenue from SOW that existed in 2020, specifically a 400% increase from an SOW with an SP500 bank, and SOW 6 and 10 with Mastercard that increased by 33.33% and 50.00%, respectively. Finally, and most notably, during the third quarter 2021, the Company executed a 6-month, $3.92 million revenue contract with ICE, which launched in the fourth quarter of 2021 and provides six monthly payments of $653 thousand until its completion on March 27, 2022.

Cost of services provided

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Cost of services provided 

$

1,151,057

$

1,520,297

$

(369,240)

 

(24.3)

%

34

Cost of services provided (“COS”) decreased by $369 thousand, or 24.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. This decrease was primarily driven by the completion of a contract with Emergent Technology Holdings (“Emergent”) in the year ended December 31, 2020, which accounted for $781 thousand or 51.35% of COS for the year ended December 31, 2020. The reduction of year-over-year (“YOY”) COS, due to the completion of the Emergent contract, was offset in 2021 by a 55.6% increase in COS related to new and existing customer implementations.

During the year ended December 31, 2021, gross profit increased by 124.0% or $1.40 million from $1.13 million for the year ended December 31, 2020 to $2.53 million for the year ended December 31, 2021. Gross margins improved by 26.1% from 42.6% for the year ended December 31, 2020 to 68.7% for the year ended December 31, 2021.

This considerable improvement in gross profit and margin is a result of the Company’s revenue mix transition. Historically, revenue contracts consisted mostly of services-based SOW to build fully customized solutions, which as a result, funded the development of the Company’s internal-use software or microservices. These microservices can be arranged in various ways to deliver semi-customizable solutions for many customers over time. As the Company transitions its revenue mix from fully-custom to semi-custom solutions, using its existing technology, margins improve dramatically as there is a relatively nominal cost to implementing existing technology, which is currently evident in the gross profit margin of the ICE revenue contract. Additionally, during the year ended December 31, 2021, the ICE revenue contract enjoyed even higher margins than expected due to certain performance obligations that were not fulfilled as of December 31, 2021. The Company anticipates it will incur higher costs in fiscal year 2022 related to other performance obligations under the ICE contract not yet delivered as of December 31, 2021, therefore, the ICE revenue contract is expected to experience lower margins in the first quarter of 2022.

Research and development

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Research and development

$

2,529,501

$

2,742,349

$

(212,848)

 

(7.8)

%

Research and development expense decreased by $213 thousand, or 7.8%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease is driven by the $1.00 million in non-cash equity compensation that was awarded to R&D team members for 2019 services and vested on December 8th, 2020 upon the Company’s public listing on Euronext Growth Exchange. This one-off award caused an unusual spike in R&D expenses for 2020. The 2021 R&D expense increases that offset the YOY variance due to the 2019 award spike were driven by the Company’s continued investment in R&D mostly by ramping up headcount during the fiscal years 2020 and 2021. In 2021, the Company’s R&D subsidiary, Trust Stamp Malta Limited, grew its headcount from 23 to 40 full-time equivalents (“FTE”). Additionally, the Company opened its African R&D center, Trust Stamp Rwanda Limited in Rwanda, staffing 11 FTE by the end of 2021. Finally, the Company added 3 new technical staff members in the US to service the ICE contract.

Selling, general, and administrative

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Selling, general, and administrative

$

8,314,575

$

6,375,637

$

1,938,938

 

30.4

%

Selling, general and administrative expense increased by $1.94 million, or 30.4%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is driven mostly by the 64.9% growth in team member headcount and associated overhead for 57 to 94 FTE. Similarly, the addition of new personnel resulted in an increase of $808 thousand in non-cash, stock-based compensation which accounted for 41.7% of the increase. YOY stock-based compensation was driven, in part, by the Company’s stock price input which is used in accounting estimates to determine the non-cash expense for equity contracts. As the Company’s stock price increased from $1.56 to $4.00 YOY, the associated expense increased exponentially.

Depreciation and amortization

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Depreciation and amortization

$

573,755

$

406,240

$

167,515

 

41.2

%

35

Depreciation and amortization expense increased by $168 thousand, or 41.2%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily attributable to depreciation and amortization charged amounting to $67 thousand for the year ended December 31, 2021 on assets purchased in Malta to establish research and development center as compared to depreciation and amortization amounting to $9 thousand for the year ended December 31, 2020. The increase is further attributable to three new patent issuances during the year ended December 31, 2021 which resulted in $34 thousand in additional amortization.

Interest income (expense)

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Interest income (expense)

$

(39,970)

$

(182,794)

$

142,824

 

(78.1)

%

Interest expense decreased by $143 thousand, or 78.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily attributable to conversion of the SixThirty Cyberfund note in June 2020 which produced a one time beneficial conversion expense of $100 thousand. Additionally, Company paid off its promissory note entered with Second Century Ventures (“SCV”) in April 2021.

Change in fair value of warrant liability

    

For the years ended December 31,

2021

2020

$Change

% Change

Change in fair value of warrant liability

$

(86,944)

$

$

(86,944)

 

The Company recognized a change in fair value of warrant liability for the year ended December 31, 2021 of $87 thousand based on the fair value assessment and adjustment for one warrant liability as described in Note 4 to the financial statements provided under Item 8 of this report.

Warrant expense

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Warrant expense

$

$

1,413,273

$

(1,413,273)

 

%

Warrant expense for the year ended December 31, 2021 is due to sale of warrants to SCV which resulted in a one time non-cash warrant expense of $1.41 million as described below in the “Liquidity and Capital Resources” section of this report.

Impairment of investment in related party

For the years ended December 31,

 

    

2021

    

2020

    

$Change

    

% Change

 

Impairment of investment in related party

$

$

(962,000)

$

962,000

 

%

Impairment of investment in related party during the year ended December 31, 2020 relates to impairment of investment in Emergent Technology Holdings LLP made by the Company in July 2019 by purchasing 9.62 Class A units from shareholder of the Company in exchange for 2,235,575 shares of Class A Shares of Common Stock in the Company. See Note 16, “Investment in Related Party”, to the financial statements included under Item 8 of this report.

Grant income

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Grant income

$

61,601

$

189,507

$

(127,906)

 

(67.5)

%

36

Grant income decreased by $128 thousand, or 67.5%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Grant income for both 2020 and 2021 relate to the Business Development and Continuity Scheme grant with the Malta Enterprise for €200 thousand. The grant proceeds were received over a 2 year period and converted from EUR to USD for a total of $251 thousand, of which $189 thousand was received in the year ended December 31, 2020 and the balance of $62 thousand was received in the year ended December 31, 2021.

Other income

    

For the years ended December 31,

 

2021

2020

$Change

% Change

 

Other income

$

56,932

$

81,137

$

(24,205)

 

(29.8)

%

Other income decreased by $24 thousand, or 29.8%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, which is primarily due to there being no realized foreign currency gains during the year ended December 31, 2021.

Other expense

    

For the years ended December 31,

2021

2020

$Change

% Change

Other expense

$

(159,533)

$

$

(159,533)

 

Other expense increased by $160 thousand for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to realized losses related to the fluctuation in foreign currency balances and other miscellaneous non-operating expenses.

Liquidity and Capital Resources

As of December 31, 2021 and 2020, we had approximately $3.48 million and $1.47 million cash in our banking accounts, respectively, with total current assets of $5.76 million and $2.08 million, respectively. The increase in current assets is mostly due to the timing of capital expenditures and fundraising cycles. During the year ended December 31, 2021, the Company spent considerable resources to launch a round of funding that, by year-end, raised approximately $5.50 million under Regulation CF, Regulation D, and Regulation S in preparation for its Nasdaq listing. See below for more details on these offerings.

Also, we have experienced a decrease in current liabilities of 2.10%. As of December 31, 2021, our current liabilities totaled $2.40 million, as compared to $2.45 million at December 31, 2020. This difference is primarily attributable to changes in timing of deferred revenue and customer deposit liabilities coupled with the payoff of nonconvertible notes payable during the year ended December 31, 2021. In both periods, there are timing related variances in revenue recognition that resulted in more deferred revenue and customer deposit liabilities recorded as of December 31, 2021 than the deferred revenue [0]and customer deposit liabilities recorded as of December 31, 2020. Various statements of work that existed as deferred revenue and customer deposit liabilities as of December 31, 2020 subsequently were recognized during the year ended December 31, 2021. Additionally, the Company had a reduction in our current debt due to the payoff of our venture loan to SCV in April 2021 as well as a decrease in our payable accounts due to the drop in third-party developer billings. As a result of the foregoing, as of December 31, 2021, the Company had a positive working capital balance of $3.36 million, and an accumulated deficit of $27.21 million.

Effective September 3, 2019, the Company entered into a software license agreement with a customer pursuant to which the Company received total fees of $150,000 in 2020 and will receive minimum total fees of $200,000 in 2021, $250,000 in 2022, rising by 15% in each subsequent year beginning in 2023 with a cap of $1.0 million. As such, we expect this to be a steady source of revenue for the Company going forward. The Company has recognized $200 thousand of the software license agreement fees for the year ended December 31, 2021. Trust Stamp received confirmation on September 17, 2021 that this license agreement has been extended through 2022.

37

On March 12, 2021, the Company launched a Regulation D raise limited to accredited investors for a maximum of $5.00 million or 1,633,986 shares. The raise was marketed only to the Company’s existing investor email list with an initial minimum investment of $25 thousand and a share price of $3.06 per share. The initial tranche of the round closed on April 5, 2021 with $3.9 million of reserved investment with the contracted sale of 1,279,825 shares of Class A Common Stock. After the initial tranche, on April 6, 2021, the Company then offered up to $700 thousand or 182,291 of additional shares, again only to accredited investors, with a $5 thousand minimum investment and at a share price of $3.84 per share. The second tranche of the round closed on June 4, 2021 with $88 thousand of reserved investment at $3.84 per share with the contracted sale of 21,400 shares of Class A Common Stock.

On August 25, 2021, the Company launched concurrent offerings under Regulation Crowdfunding (“Regulation CF”), Regulation D, and Regulation S. The Company initially sought to raise up to $5.00 million in aggregate between the three offerings through the sale of units, but had the discretion to accept up to $5.00 million in each offering. Each unit consists of 1 share of the Company’s Class A Common Stock, par value $0.01 per share, and 1 warrant to purchase 1 share of Class A Common Stock of the Company in a future registered or exempt offering of the Company (i.e. a Regulation CF, Regulation D, or Regulation S Warrant, as applicable). The minimum target amount under the Regulation CF offering was $100 thousand, which the Company achieved.

On November 19, 2021, we closed the Regulation CF offering, having received binding commitments for 1,250,000 units at $4.00 per unit for a total of $5,000,000 in gross proceeds. We continued to hold closings on investments from investors who subscribed prior to November 19, 2021. We raised a final total of $4,551,900 in gross proceeds from the issuance of 1,137,975 Regulation CF units to investors in this offering.

On January 7, 2022, we closed the public portion of the Regulation D offering. We raised a final total of $863,956 in gross proceeds from the issuance of 215,989 Regulation D units to investors in this offering. We conducted an additional close on February 2, 2022, receiving gross proceeds of $100,000 and issuing 25,000 Regulation D units to that investor.

On January 7, 2022, we closed the Regulation S offering. We raised a final total of $224,416 in gross proceeds from the issuance of 56,104 Regulation S units to investors in this offering.

On September 23, 2021, the Company was awarded a $3,920,764 contract with ICE. A copy of this agreement is filed as Exhibit 10.12 to this report. Alongside the revenue implications of this specific contract, it is believed that a successful execution will lead to extended and additional contracts of the same nature with ICE.

On December 21, 2021, REach® executed a Notice of Exercise for its warrants to purchase 400,641 shares of Class A Common Stock at an exercise price of $0.1664 per share for a total purchase price of $67 thousand.

On December 21, 2021, SCV executed a Notice of Exercise for certain of its warrants to purchase 2,037,560 shares of Class A Common Stock at an exercise price of $1.60 per share for a total purchase price of $3.3 million.

The Company believes that revenues from its existing clients, without any new contracts (i.e. a renewal of the ICE contract described above) or proceeds from the Company’s current capital raising efforts, will provide it with adequate amounts of cash to meet the Company’s needs in the short-term (i.e., the next 12 months) and in the long-term (i.e., beyond the next 12 months).

The Company expects that human resources costs – i.e., compensation for new and existing officers, directors, and employees – will be the largest material cash obligation for the Company within the next 12 months, with projected human resources costs totaling approximately $750,000 per month. The Company believes, as described above, cash on hand combined with revenues from its existing operations will be sufficient to cover these costs, and that any funds from new client contracts or offerings would provide additional operational capacity for the Company going forward.

38

Issuances of Equity, Notes, Warrants and SAFEs

Series A Preferred Stock offering. On July 17, 2020, we closed our Series A Preferred Stock offering, which utilized Regulation A under the Securities Act of 1933 and was qualified by the Securities and Exchange Commission (“SEC”) on May 5, 2020. The offering involved sales through a combination of private placements, including through issuance of convertible notes, and investments through the SeedInvest platform. We issued through a conversion of convertible instruments or sold a total of 1,264,452 shares of Series A Preferred Stock at an offering price of $7.79 per share. Gross proceeds raised from this offering were $8.4 million in total and offering costs were $1 million resulting in net cash proceeds of $7.4 million.

As part of this offering, two buyers were also able to purchase shares of Class A Shares of Common Stock for $0.01 per share while paying a price of $7.79 per share for Series A Preferred Stock for a total purchase price of $475 thousand. As a result, the proceeds were allocated between the Series A Preferred Stock and common shares on a relative fair value basis resulting in the recognition of $366 thousand as Series A Preferred Stock and $109 thousand to Class A Common Stock. Gross and net proceeds disclosed above have been adjusted for this allocation.

In addition to the gross cash proceeds above, as part of the Series A Preferred Stock raise, the Company also reserved common shares for stock options and restricted stock awards granted to employees in 2020 with a grant date fair value of $631 thousand, we exchanged $400 thousand of common shares for a portion of the outstanding Emergent SAFE as discussed in Note 5 to the financial statements included under Item 8 of this report, and we sold warrants for Class A Shares of Common Stock for in exchange for the extinguishment of a SAFE for $125 thousand, $300 thousand in cash and $300 thousand in prepaid sponsorship value for an accelerator program which is further discussed below.

As of September 8, 2020, the Company and most of the Series A Preferred Stockholders voted to convert all Series A Preferred Stock to shares of Class A Common Stock, and it was effective on that date.

Regulation D Common Stock offering. See more information on Regulation D fundraising in Liquidity and Capital Resources disclosure above.

Convertible Notes. On December 16, 2016, we entered a convertible promissory note with an investor in which we received $100 thousand through the issuance of the convertible promissory note and a warrant to purchase $50 thousand of Class A Shares of Common Stock. The principal, together with all accrued and unpaid interest, was initially due on December 16, 2018 and was not pre- payable unless there is a change in control. An extension was granted by the investor to extend the maturity date to June 30, 2020. The convertible notes included several conversion terms, including one around qualified financing where if our next financing occurred on or before the maturity date, and we raised $2 million or more in case, the note would be converted into preferred stock. The qualified financing term was triggered for this convertible note payable when $2 million was raised prior June 30, 2020 as discussed above. Therefore, this convertible note, along with all accrued interest, totaling $118 thousand was converted to 68,203 shares of Series A Preferred Stock, considering the valuation cap, and is no longer reflected as outstanding as of December 31, 2020.

On December 3, 2019, we entered a convertible promissory note with a customer in which they received $700 thousand. All unpaid principal and accrued interest were due on December 31, 2020 (i.e. the maturity date). However, in the event that the note was not converted into equity securities of the Company, the maturity date would be extended to December 31, 2025. The convertible note included several conversion terms, including one around qualified financing where if we issued and sold shares of our preferred stock for aggregate gross proceeds of at least $3 million (including this Note but excluding all proceeds from the incurrence of all other prior indebtedness that is converted into such preferred stock, or otherwise cancelled in consideration for the issuance of such preferred stock) with the principal purpose of raising capital, the note would be converted into preferred stock. The qualified financing term was triggered for this convertible note payable as $3 million was raised prior June 30, 2020 as discussed above. Therefore, the convertible note was converted to 89,859 shares of Series A Preferred Stock and is no longer reflected as outstanding as of December 31, 2020.

During 2020, we issued $45 thousand in convertible debt to the advisor. As of December 31, 2020, we had converted the $45 thousand in convertible debt to Series Preferred Stock at a value of $7.79 per share, and ultimately into Common Stock on December 8, 2020.

39

Non-Convertible Promissory Notes Payable. On April 22, 2020, the Company entered into a promissory note for $350 thousand with Second Century Ventures (“SCV”) in which the Company received net proceeds of $345 thousand after issuance costs. The unpaid principal, together with any then unpaid and accrued interest and any other amounts payable was due and payable on April 22, 2021 or in an event of default or a change in control as defined in the agreement. The note accrued interest at a rate of 8% per annum, compounded monthly. The note was repaid in a timely manner.

With the issuance of the note on April 22, 2020, the Company entered into a warrant agreement to purchase Class A Shares of Common Stock of the Company with SCV. The warrant agreement issued SCV a warrant to purchase 75,000 shares at a strike price of $0.002 per share through April 22, 2021. At the expiration of the warrant agreement the warrants will be automatically exercised if the fair market value of the exercise shares exceeds the exercise price. If at any time during the term the fair market value of the exercise shares exceeds five times the exercise price the Company shall provide SCV written notice and SCV may elect to exercise the warrant. If at any time during the term of the warrant agreement any portion of the Class A Shares of Common Stock are converted to other securities the warrants shall become immediately exercisable for that number of shares of the other securities that would have been received if the warrant agreement had been exercised in full prior to the conversion and the exercise price shall be adjusted. We determined that the appropriate classification of this warrant was as an equity instrument that will not be subject to fair value remeasurement going forward.

As the promissory notes issued included equity classified warrants issued, U.S. GAAP requires that the proceeds from the sale of debt instruments with a separate equity instrument be allocated to the two elements based upon the relative fair values of the debt instrument without the warrant and of the warrant itself at the time of issuance. The portion of the proceeds allocated to the Class A Shares of Common Stock shall be accounted for within stockholders’ equity as additional paid-in capital and recorded as a debt discount and be charged to interest expense over the life of the convertible notes. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction. The value of the promissory note was allocated on a relative fair value basis between the note and the warrants. This allocation based upon relative fair values of the promissory note and warrant resulted in an amount of $88 thousand being allocated to the equity warrants and $262 thousand being allocated to the promissory notes, resulting in the same amount representing a discount to the promissory note. Accretion expense of $62 thousand was recorded and interest payable of $20 thousand was accrued related to these notes during the year ended December 31, 2020.

On June 11, 2020 we entered into an agreement with Emergent, as described below, whereby their SAFE would be extinguished in exchange for several forms of consideration. As part of that agreement, one form of consideration is that the Company issued promissory notes to Emergent in the amount of $387 thousand which is due in two tranches in August and September 2020. No interest is due and payable under these notes if we pay by the maturity dates previously described. We paid within the maturity date.

Warrants. In January 2020, the Company has issued to an investor a warrant to purchase 932,210 shares of the Company’s Class A Shares of Common Stock at an exercise of $1.60 per share in exchange for the cancellation of a $100 thousand SAFE issued on August 18, 2017 by the Company’s affiliate Trusted Mail Inc. with an agreed value of $125 thousand. See Note 4 to the financial statements included under Item 8 of this report for the reduction in SAFE liability for this amount. The warrants were issued on January 23, 2020. There is no vesting period, and the warrants expire on December 20, 2024.

In January 2020, the Company has issued to an investor a warrant to purchase 4,660,555 shares of the Company’s Class A Shares of Common Stock at a strike price of $1.60 per share in exchange for $300 thousand in cash and “Premium” sponsorship status with a credited value of $100 thousand per year for 3 years totaling $300 thousand. This “premium” sponsorship status provides the Company with certain benefits in marketing and networking, such as the Company being listed on the investor’s website, as well providing the Company certain other promotional opportunities organized by the investor. The warrants were issued on January 23, 2020. There is no vesting period, and the warrants expire on December 20, 2024.

The fair value of the two warrants above issued in January 2020 was estimated on the date of grant using the Black-Scholes-Merton model and was valued using the following assumptions: fair value of Class A Shares of Common Stock of $1.56, exercise price of $1.60 risk free interest rate of 1.58%, dividend yield of 0%, expected volatility of 44%, and contractual term of two years. The total fair value of these warrants was determined to be $2.1 million and is recorded in the consolidated statement of stockholders’ equity (deficit). Thus, fair value is $1.4 million in excess of the total consideration received for the warrants of $725 thousand. This amount is expensed within the consolidated statement of operation.

40

Emergent and Tripartite Agreement

The Company and Emergent entered into a SAFE in which Emergent obtained the right to shares of the Company’s stock (purchase amount of $2.1 million and valuation cap of $20 million) that would be exercised upon a qualified equity financing. A put option also exists in this agreement in which at the earlier of 18 months from the agreement date and the date on which the Company has raised more than $7 million of qualified equity financing, Emergent may require repayment of the unrepaid element of the purchase amount and the Company would be required to make such repayment.

On February 4, 2020, the Company entered into a tripartite agreement with Emergent and 10Clouds whereby:

The Company received a Purchase Order from Emergent in which Emergent requested $300 thousand worth of services to be provided by the Company under mutually agreed statements of work from the effective date through December 31, 2020. The intention of these services is to reduce the Emergent SAFE amount owed by the Company.
The Company will enter into statements of work with 10Clouds for appropriate sub-contract work under the Purchase Order.
The Company issued an additional SAFE to 10Clouds for $200 thousand subject to an absolute right for the Company at its option to redeem that $200 thousand for cash or settle it through the conversion to Series A preferred stock.
Emergent reduces the balance due on the Emergent SAFE by $500 thousand with immediate effect and asserts the outstanding balance to be $1.6 million.
On June 11, 2020, the Company entered into additional agreement with Emergent whereby:
Emergent will issue an irrevocable Purchase Order for $500 thousand worth of services to be provided by the Company under mutually agreed statements of work from the effective date through December 31, 2020. We subsequently entered into an SOW with 10Clouds for $500 thousand to provide the requested services.
Emergent forgave $104 thousand of the value of the SAFE to represent expected profit margin for the $500 thousand worth of services described above.
The Company issued $400 thousand of Class A Shares of Common Stock to Emergent’s designated assignees at a price of $1.56 per share (256,740 shares). This has been reflected in the statement of stockholders’ equity as of September 30, 2020.
The Company paid Emergent $220 thousand and this has been reflected in the statement of cashflows.
The Company entered into a promissory note with Emergent for $387 thousand payable which has been paid and reflected in the statement of cashflows.

The intention of the above services and transactions is to wholly settle the SAFE and as of December 31, 2020, the Emergent SAFE was extinguished in full. The Company converted the $200 thousand SAFE note into 25,674 shares of Series A Preferred Stock which was subsequently converted to Class A Shares of Common Stock on September 8, 2020 along with all shares of Series A Preferred Stock.

Regulation A Warrant Offering. On January 26, 2022, the Company commenced an offering pursuant to Regulation A in which it qualified for issuance 1,435,068 shares of our Class A Common Stock that may be issued upon exercise of the warrants of the Company issued in the Company’s Regulation Crowdfunding offering (the “Reg CF Warrants”), the Company’s Regulation D offering (the “Reg D Warrants”), and the Company’s Regulation S offering (the “Reg S Warrants”). The Reg CF Warrants, Reg D Warrants, and Reg S Warrants are exercisable into Class A Common Stock of our Company at an exercise price of $4.00 per share, for maximum gross proceeds of $5,740,272. As of the date of this report, the Company has received $57 thousand in proceeds from the exercise of 14,250 warrants in this offering.

41

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2021 and 2020:

    

For the years ended December 31,

2021

2020

Net cash flows from operating activities

$

(6,714,474)

$

(4,482,670)

Net cash flows from investing activities

$

(768,353)

$

(512,165)

Net cash flows from financing activities

$

9,349,770

$

6,087,893

Operating Activities

Net cash used in operating activities of $6.71 million for the year ended December 31, 2021 was primarily related to net loss of $9.06 million and changes in net operating assets and liabilities of $1.36 million which is offset by non-cash charges of $2.78 million related to stock based compensation and $574 thousand related to depreciation and amortization expense. The net change in operating assets and liabilities were primarily due to an increase in accounts receivable of $1.14 million, increase in prepaid expenses and other current assets of $538 thousand, increase in accounts payable and accrued expenses of $177 thousand, an increase in deferred revenue of $34 thousand, and an increase in customer deposit liabilities of $280 thousand.

Net cash used in operating activities of $4.48 million for the year ended December 31, 2020 was primarily related to net loss of $10.68 million and change in net operating and assets and liabilities of $1.3 million which is offset by non-cash charges of $2.52 million related to stock based compensation, depreciation and amortization expense of $406 thousand, noncash warrant expense of $1.41 million, non-cash revenue related to Emergent termination of $904 thousand, and the write off of investment in Emergent amounting to $962 thousand. The net change in operating assets and liabilities were primarily due to an increase in other assets of $151 thousand, increase in accounts payable and accrued expenses of $985 thousand, increase in related party payables of $250 thousand and an increase in deferred revenue of $328 thousand.

Investing Activities

Net cash used in investing activities of $768 thousand for the year ended December 31, 2021 was related to amount capitalized for internal developed software of $482 thousand, cost related to patent application of $161 thousand, acquisition of Pixelpin intangible assets of $91 thousand, and purchases of property and equipment of $34 thousand.

Net cash used in investing activities of $512 thousand for the year ended December 31, 2020 was related to amount capitalized for internal developed software of $360 thousand, cost related to patent application of $22 thousand and purchase of property and equipment of $130 thousand.

Financing Activities

Net cash provided by financing activities of $9.35 million for the year ended December 31, 2021 was primarily related to proceeds from issuance of common stock for $8.76 million, soft loan and grant proceeds from the government of Malta of $856 thousand, and the repayment of the promissory note payable with SCV of $344 thousand.

Net cash provided by financing activities of $6.09 million for the year ended December 31, 2020 was primarily related to proceeds from issuance of Series A preferred stock of $6.80 million, proceeds from issuance of common stock of $264 thousand, proceeds from issuance of Series A preferred stock warrants of $300 thousand, proceeds from debt of $345 thousand which was offset by issuance cost of $1.00 million and repayment of SAFE note of $607 thousand.

Liquidity

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a business that has not yet generated profits with a loss in the year ended December 31, 2021 of $9.06 million, operating cash outflows of $6.71 million for the same period, and an accumulated deficit of $27.21 million as of December 31, 2021.

42

The Company’s ability to continue as a going concern in the next twelve months following the date the consolidated financial statements were available to be issued is dependent upon its ability to produce revenues and/or obtain financing sufficient to meet current and future obligations and deploy such to produce profitable operating results. Management has evaluated these conditions and due to the capital raise as discussed in Note 17 to the financial statements included under Item 8, we believe that we have sufficient liquidity to support the planned operations of our business for twelve months from the date these financials are issued.

Commitments and Contractual Obligations

The following table summarizes our non-cancellable contractual obligations as of December 31, 2021:

    

Payments Due by Period

Less Than 

Total

1 Year

1-3 Years

3-5 Years

Operating lease obligations

$

577,471

 

$

370,493

 

$

143,152

$

63,826

Purchase obligations

 

 

 

 

Total contractual obligations

$

577,471

 

$

370,493

 

$

143,152

 

$

63,826

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Off-Balance Sheet Arrangements

We did not have, during the years ended December 31, 2021 and 2020, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

The critical accounting policies and estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Capitalized Internal-Use Software, Net

Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development are capitalized. The Company capitalizes eligible costs to develop internal-use software that are incurred subsequent to the preliminary project stage through the development stage. These costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Costs incurred during the preliminary project stage and during the post implementation operational stage are expensed as incurred. Maintenance costs are expensed as incurred. The estimated useful life of costs capitalized is evaluated for each specific project. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore changes in amortization expense in future periods.

43

Revenue Recognition

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

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

Identification of the contract, or contracts with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the Company satisfies the performance obligations.

At contract inception, the Company will assess the services agreed upon within each contract and assess whether each service is distinct and determine those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. In general, each contract with a customer consists of a single performance obligation to perform services in which revenue is recognized when the service has been delivered.

During the year ended December 31, 2021, the Company entered into a significant contract with ICE that contained multiple performance obligations, including software application development, phones, and services to assist ICE. The Company allocates the transaction price for this contract based on the stand-alone selling price of each performance obligation. The Company uses the expected cost-plus margin approach for determining the stand-alone selling prices of the phones and services to assist ICE, as this is believed to be the most accurate method of allocating the transaction price to these performance obligations, maximizing the use of observable inputs. As the Company does not have a similar software application that has been sold to another customer, the Company uses the residual approach for determining the stand-alone selling price of the software application development by subtracting the sum of the stand-alone selling prices for the phones and services to assist ICE from the total transaction price.

Contract Balances

The timing of customer billing and payment relative to the start of the service period varies from contract to contract; however, the Company bills many of its customers in advance of the provision of services under its contracts, resulting in contract liabilities consisting of either deferred revenue (a “contract liability”) or customer deposit liabilities. Deferred revenue represents billings under noncancelable contracts before the related product or service is transferred to the customer. Such amounts are recognized by the Company over the life of the contract upon meeting the revenue recognition criteria, but generally within one year. Customer deposit liabilities consist of billings or payments received in advance of the start of the contractual term or for anticipated revenue generating activities for the portion of a contract term that is subject to cancellation for convenience. Certain of the Company’s arrangements generally include terms that allow the customer to terminate the contract for convenience and receive a refund of the amount of the customer deposit for the percentage of the work not performed prior to the notice of termination. In these arrangements, the Company concluded there are no enforceable rights and obligations after such notice period and therefore the consideration received or due from the customer that is subject to termination for convenience is recorded as customer deposit liabilities.

The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 to 60 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.

44

Costs to Obtain and Fulfill Contracts

Incremental costs of obtaining a contract include only those costs that are directly related to the acquisition of contracts, including sales commissions, and that would not have been incurred if the contract had not been obtained. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it is expected that the economic benefit and amortization period will be longer than one year. Costs to obtain contracts were not material in the periods presented. The Company recognizes an asset for the costs to fulfill a contract with a customer if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. Costs to fulfill contracts were not material in the periods presented.

Remaining Performance Obligation

Our remaining performance obligations are comprised of product and services revenue not yet delivered.

Stock-Based Compensation

The Company accounts for its stock-based compensation arrangements at fair value. Fair value of each option grant is estimated on the date of grant using either the Black-Scholes-Merton Model for stock options granted or using the fair value of a common stock for grants and restricted stock units. The calculated fair value is recognized as expense over the requisite service period, net of estimated forfeitures, using the straight-line method.

Income Taxes

The Company records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. The deferred assets and liabilities are measured using the statutorily enacted tax rates anticipated to be in effect when those tax assets and liabilities are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for a valuation allowance.

The Company’s tax positions are subject to income tax audits by multiple tax jurisdictions. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not the position will be sustainable upon examination by the taxing authority, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. The Company makes adjustments to these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and operating results.

Simple Agreements for Future Equity (“SAFEs”)

The Company has issued several SAFEs in exchange for cash financing. These funds were classified as long-term liabilities The Company accounted for its SAFEs as liability derivatives under ASC 815, Derivatives and Hedging. If any changes in the fair value of the SAFEs occurred, the Company would have recorded such changes through earnings, under the guidance prescribed by ASC 825-10.

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Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, refer to Note 1 to the financial statements included under Item 8. Description of Business and Summary of Significant Accounting Policies in our consolidated financial statements included elsewhere in Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

T Stamp Inc. and Subsidiaries

Atlanta, Georgia

Opinion on the Consolidated Financial Statements

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

Basis for Opinion

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

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

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

Emphasis of Matter Regarding Liquidity

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

/s/ Cherry Bekaert LLP

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

Atlanta, Georgia

April 6, 2022

F-1

T STAMP INC.

CONSOLIDATED BALANCE SHEETS

As of December 31,

    

2021

    

2020

ASSETS

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

3,475,695

$

1,469,952

Accounts receivable

 

1,278,286

 

140,853

Related party receivables

 

13,648

 

14,505

Prepaid expenses and other current assets

 

996,602

 

458,995

Total Current Assets

 

5,764,231

 

2,084,305

Capitalized internal-use software, net

 

1,160,044

 

1,131,484

Goodwill

 

1,248,664

 

1,248,664

Intangible assets, net

 

201,807

 

22,382

Property and equipment, net

111,768

127,975

Other assets

 

178,140

 

197,956

Total Assets

$

8,664,654

$

4,812,766

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

  

 

  

Current Liabilities:

 

  

 

  

Accounts payable

$

304,140

$

380,525

Related party payables

 

252,773

 

448,305

Accrued expenses

1,059,532

809,203

Nonconvertible notes plus accrued interest of $- and $19,730, less discount of $- and $25,511, respectively

 

 

344,219

Deferred revenue

 

503,433

469,105

Customer deposit liabilities

 

280,108

 

Total Current Liabilities

 

2,399,986

 

2,451,357

Warrant liabilities

 

374,694

 

287,750

Non-convertible notes plus accrued interest of $12,252 and $-, respectively

 

856,258

 

Total Liabilities

 

3,630,938

 

2,739,107

Commitments and Contingencies, Note 14

 

  

 

  

Stockholders' Equity:

 

  

 

  

Series A Preferred Stock $.01 par value, 2,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2021 and 2020, respectively

 

 

Common stock $.01 par value, 37,500,000 shares authorized, 20,475,143 and 17,695,985 shares issued and outstanding at December 31, 2021 and 2020, respectively

 

204,751

 

176,965

Treasury stock, at cost: 282,565 shares held as of December 31, 2021 and 2020, respectively

 

 

Additional paid-in capital