T STAMP INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview
Trust Stamp develops proprietary artificial intelligence-powered identity and trust solutions at the intersection of biometrics, privacy, and cybersecurity, that enable organizations to protect themselves and their users, while empowering individuals to retain ownership of their identity data and prevent fraudulent activity using their identity. Trust Stamp tackles industry challenges including data protection, regulatory compliance, and financial accessibility, with cutting edge technology including biometric science, cryptography, and machine learning. Our core technology irreversibly transforms identity information to create tokenized identifiers that enable accurate authentication without the need to store or share sensitive data. By retaining the usefulness of biometric-derived data while minimizing the risk, we allow businesses to adopt biometrics and other anti-fraud initiatives while protecting personal information from hacks and leaks. Trust Stamp's key sub-markets are identity authentication for the purpose of account opening, access and fraud detection, the creation of tokenized digital identities to facilitate financial and societal inclusion, and in-community case management software for alternatives to detention and other governmental uses. As biometric solutions proliferate, so does the need to protect biometric data. Stored biometric images and templates represent a growing and unquantified financial, security and PR liability and are the subject of governmental, media and public scrutiny, since biometric data cannot be "changed" once they are hacked, as they are directly linked to the user's physical features and/or behaviors. Privacy concerns around biometric technology have led to close attention from regulators, with multiple jurisdictions placing biometrics in a special or sensitive category of personal data and demanding much stronger safeguards around collection and safekeeping. To address this unprecedented danger and increased cross-industry need to establish trust quickly and securely in virtual environments, Trust Stamp has developed its Irreversibly Transformed Identity Token, or IT2, solutions, which replace biometric templates with a cryptographic hash that can never be rebuilt into the original data and cannot be used to identify the subject outside the environment for which it is designed. Trust Stamp's data transformation and comparison technology is vendor and modality agnostic, allowing organizations including other biometric services providers to benefit from the increased protection, efficiency, and utility of our proprietary tokenization process. With online and offline functionality, Trust Stamp technology is effective in even the most remote locations in the world. Trust Stamp also offers end-to-end solutions for multi-factor biometric authentication for account access and recovery, KYC/AML compliance, customer onboarding, and more, which allow organizations to approve more genuine users, keep bad actors from accessing systems and services, and retain existing users with a superior user experience. Management has evaluated the market potential for its services in part by reviewing the following reports, articles, and data sources, none of which were commissioned by the Company, and none are to be
incorporated by reference:
4
Data security and fraud
· In 2021, 4,145 publicly disclosed breaches exposed over 22 billion records
according to the 2021 Year End Data Breach QuickView Report.
· eCommerce, airline ticketing, money transfer and banking services are estimated
to cumulatively lose over
2024, according to a 2020
Biometric authentication
· Juniper research estimates that biometrics will annually authenticate over
trillion in payment transactions by 2025.
· The global biometric system market is projected to grow from
2020 to
report.
Financial and societal inclusion
· As of 2017, 1.7 billion people lacked basic financial services including a bank
account, and 4 billion people were underbanked according to the
Global Findex 2017 report. (NB. estimates for people lacking basic financial
services are now closer to 1.4 billion people).
· More than 200 million small and medium-sized enterprises in emerging markets
lack access to finance, limiting their ability to grow and thrive (UNGSA Financial Inclusion)
· The global market for Microfinance estimated at
2020, is projected to reach
Microfinance Market Report 2022.
Alternatives to detention ("ATD")
· Addressing the
submitted by ICE for approval included an additional
program over and above the present appropriation and that ICE is "focusing on
ATD" instead of more expensive physical detention programs; both because of the
threat of COVID and because ATD is less expensive and more humane.
· On that same day, the Ranking Member of the Subcommittee shared that 230,000
participants are currently in the ATD program with a planned increase to 600,000 participants.
· The bipartisan Appropriations Committee has recommended a funding increase of
financial year 2023 to fund increases in enrollments into the Alternative to
Detention and Secure Docket programs, and case management services and participation.
Our Customers and Business -
Trust Stamp's key sub-markets are:
i) Identity authentication for the purpose of account opening, access and fraud detection;
ii) The creation of tokenized digital identities to facilitate financial and societal inclusion; and
iii) In-community case-management services for governmental agencies
5
i) In parallel with our engagements with an S&P 500 bank and other financial and
FinTech institutions, we continued to expand our work with Fidelity Information
Services, LLC ("FIS") with our proprietary tokenization technology being
utilized in FIS' new global identity authentication system. To date, two banks
have committed to FIS pilots using Trust Stamp technology and it is anticipated
that a number of additional banks will be onboarded into pilots by the end of
2022. The pilots utilize the Company's next-generation identity package,
offering rapid deployment across devices and platforms, with custom workflows
that seamlessly orchestrate trust across the identity lifecycle for a consistent
user experience in processes for onboarding and KYC/AML, multi-factor
authentication, account recovery, fraud prevention, compliance, and more. The
orchestration layer that has been developed facilitates no-code and low-code
implementations of the Company's technology making adoption faster and even more
cost-effective for a broader range of potential customers.
ii) Under a ten-year technology services agreement ("the TSA ") with Mastercard
International entered into in March 2019 , the Company's IT2 technology is being
implemented by Mastercard for Humanitarian & Development purposes as a core
element of its Community Pass and Inclusive Identity offerings. Use cases
include not only financial services for individuals and businesses but also
empowering people and communities to meet basic needs, such as nutritious food,
clean water, housing, education, and healthcare including Ethiopia's
implementation of Mastercard's Wellness Pass within Ethiopia's health
information system to promote efficiency in healthcare tracking and offline
portability of health records.
Under the TSA , the Company is paid to develop and host software solutions
utilizing the IT2 and to support Mastercard's implementations. In addition, the
Company is paid on a "per use" basis for all transactions utilizing its
technology. To date the Company has received guaranteed minimum annual payments
on account of usage but anticipates significant use-based revenue starting in
2023 and growing year-on-year thereafter.
iii) On September 23, 2021 , the Company was awarded a contract with the US
Department of Homeland Security , Immigration and Customs Enforcement Division
("ICE"). Effective March 27, 2022 , Trust Stamp agreed to a bilateral
modification (the "ICE Contract") of that September 2021 contract. The
modification (which has been amended to implement an up 90-day cessation of
performance, as described further below) 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 . The Company
anticipates significant ongoing growth opportunities for its software products
in the Alternative to Detention Program and in the provision of other
in-community case management services for federal and state agencies. Refer to
the Liquidity and Capital Resources subsection below for an expanded discussion
of the 90-day and 60-day cessation as well as termination of the ICE Contract.
In addition to its key sub-markets, the Company is developing products and working with partners and industry organizations in other sectors that offer significant market opportunities, in particular, the travel, healthcare, Metaverse platform and cryptographic key and account credential safekeeping sectors.
Key Business Measures In addition to the measures presented in our consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. Adjusted EBITDA This discussion includes information about Adjusted EBITDA that is not prepared in accordance withU.S. GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed byU.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 representsU.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. 6 Management believes that Adjusted EBITDA, when viewed with our results underU.S. GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our Company and our management, and it will be a focus as we invest in and grow the business.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:
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 ourU.S. GAAP results and using Adjusted EBITDA only as a supplement to ourU.S. GAAP results.
Reconciliation of Net Loss to Adjusted EBITDA
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021Net loss before taxes$ (2,922,286 ) $ (1,966,889 ) $ (4,614,348 ) $ (3,998,782 ) Add: Other expense 272 - 94,785 36,185 Less: Other income (5,673 ) (35,365 ) (12,614 ) (10,806 ) Add: Interest expense (income) 2,354 7,829 6,312 40,049 Add: Stock-based compensation 459,646 657,928 747,432 830,039 Add: Impairment loss of digital assets 23,885 - 23,885 - Add: Non-cash expenses for in-kind services 27,930 28,004 55,860 55,934 Add: Depreciation and amortization 190,703 152,171 344,631 273,623 Adjusted EBITDA loss (non-GAAP)$ (2,223,169 ) $ (1,156,322 )
$ (3,354,057 ) $ (2,773,758 ) Adjusted EBITDA loss (non-GAAP) for the three months endedJune 30, 2022 , increased by 92.26%, to$2.22 million from$1.16 million for the three months endedJune 30, 2021 . The overall increase in adjusted EBITDA loss (non-GAAP) was driven primarily by an increase in selling, general and administrative expenses of$580 thousand and research and development expenses of$258 thousand during the three months endedJune 30, 2022 . See "Results of Operations" below for further discussion on the drivers behind the increase in gross margin and selling, general and administrative expenses during the three months endedJune 30, 2022 . Adjusted EBITDA loss (non-GAAP) for the six months endedJune 30, 2022 , increased by 20.92%, to$3.35 million from$2.77 million for the six months endedJune 30, 2021 . The overall increase in adjusted EBITDA loss (non-GAAP) was driven by a$1.82 million increase in selling, general and administrative expenses, research and development expenses of$539 thousand , and cost of services of$438 thousand during the six months endedJune 30, 2022 , offset by an increase in net revenues of$2.28 million during the six months endedJune 30, 2022 . See "Results of Operations" below for further discussion on the drivers behind the increase in gross margin and selling, general and administrative expenses during the six months endedJune 30, 2022 . 7
Comparison of the Three and Six Months Ended
The following table summarizes our condensed consolidated statements of
operations for the three and six months ended
For the three months ended For the six months ended
June 30, June 30,
2022 2021 2022 2021
Net revenue $ 708,288 $ 719,409 $ 3,529,333 $ 1,251,692
Operating Expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below) 348,166 346,594 1,042,144 604,013
Research and development 574,490 316,579 1,022,903 483,819
Selling, general, and administrative 2,532,849 1,953,047 5,698,695 3,874,884
Depreciation and amortization 190,703 152,171 344,631 273,623
Total Operating Expenses 3,646,208 2,768,391 8,108,373 5,236,339
Operating Loss (2,937,920 ) (2,048,982 ) (4,579,040 ) (3,984,647 )
Non-Operating Income (Expense):
Interest income (expense) (2,354 ) (7,829 ) (6,312 ) (40,049 )
Change in fair value of warrant
liability 36,472 - 77,060 -
Grant income - 54,557 - 51,293
Impairment of digital assets (23,885 ) -
(23,885 ) -
Other income 5,673 35,365 12,614 10,806
Other expense (272 ) - (94,785 ) (36,185 )Total Other Income (Expense), Net 15,634 82,093 (35,308 ) (14,135 ) Net Loss before Taxes (2,922,286 ) (1,966,889 ) (4,614,348 ) (3,998,782 ) Income tax expense - - - - Net loss including noncontrolling interest (2,922,286 ) (1,966,889 ) (4,614,348 ) (3,998,782 ) Net loss attributable to noncontrolling interest - (864 ) - (864 ) Net loss attributable to T Stamp Inc.$ (2,922,286 ) $ (1,966,025 ) $ (4,614,348 ) $ (3,997,918 ) Basic and diluted net loss per share attributable to T Stamp Inc.$ (0.13 ) $ (0.10 ) $ (0.20 ) $ (0.22 ) Weighted-average shares used to compute basic and diluted net loss per share 23,266,587 18,828,225 23,008,941 18,435,847
Comparison of the Three Months Ended
Net revenue
Three months ended June 30,
2022 2021 $ Change % Change
Net revenue $ 708,288 $ 719,409 $ (11,121 ) (1.55 )%
Net revenue decreased by $11 thousand , or 1.55% during the three months ended
June 30, 2022 , and consisted of $201 thousand from ICE, $152 thousand from
Mastercard, $264 thousand from a S&P500 bank, and the remaining $91 thousand
from various other customers.
Revenue from new statements of work ("SOW") totaled $396 thousand which derived
from revenue agreements with a total value of $3.67 million . The most notable
new revenue agreement was from the contract modification that the Company
executed with ICE, effective March 27th, 2022 , to increase the total contract
award value to $7,176,364 from the original $3,920,764 and extending the
delivery period until September 26, 2022 . Refer to the Liquidity and Capital
Resources subsection below for an expanded discussion of the 90-day and 60-day
cessation as well as termination of the ICE Contract.
8
Cost of services
Three months ended June 30,
2022 2021 $ Change % Change
Cost of services $ 348,166 $ 346,594 $ 1,572 0.45 %
Cost of services ("COS") increased by $2 thousand or 0.45% for the three months
ended June 30, 2022 , compared to the three months ended June 30, 2021 . The
increase between the periods were driven primarily by the $111 thousand in labor
costs related to servicing requirements from the ICE Contract, which was not
incurred during the three months ended June 30, 2021 . Furthermore, we incurred
$51 thousand more in web hosting charges during the three months ended June 30,
2022 , both internally and with our customers, which was driven by additional
customer implementations and usage. Web hosting costs totaled $178 thousand
during the three months ended June 30, 2022 , of which $91 thousand was invoiced
to our customers, compared to the three months ended June 30, 2021 , which had
$108 thousand in web hosting charges and $72 thousand invoiced to customers. In
addition, there was a $13 thousand increase in internal COS for the three months
ended June 30, 2022 .
The COS increases for the three months endedJune 30, 2022 were offset by a$79 thousand decrease in stock-based compensation. In addition, there is a$61 thousand decrease in COS for the three months endedJune 30, 2022 due to the completion and billing of the FIS SOW during the three months endedJune 30, 2021 .
Gross profit during the comparative periods decreased slightly by 3.40% or$12 thousand from$373 thousand for the three months endedJune 30, 2021 , to$360 thousand for the three months endedJune 30, 2022 . Gross margins decreased by 0.98% from 51.82% for the three months endedJune 30, 2021 , to 50.84% for the three months endedJune 30, 2022 . Research and development Three months ended June 30, 2022 2021 $ Change % Change Research and development$ 574,490 $ 316,579 $ 257,911 81.47 % Research and development ("R&D") expenses increased by$257 thousand , or 81.47% for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . The increase in R&D expense during the three months endedJune 30, 2022 was driven by an increase in R&D activities, as well as growth of our R&D team. Comparing the three months endedJune 30, 2021 to the three months endedJune 30, 2022 , the Company grew its R&D team from 53 to 68 full-time equivalents ("FTE").
Selling, general, and administrative
Three months ended June 30,
2022 2021
$ Change % Change
Selling, general, and administrative
Selling, general, and administrative expense ("SG&A") increased by $580
thousand , or 29.69% for the three months ended June 30, 2022 , compared to the
three months ended June 30, 2021 . The increase in SG&A expense during the three
months ended June 30, 2022 was driven mostly by the $211 thousand variance in
payroll tax expenses as a result of the receipt of a $161 thousand during the
three months ended June 30, 2021 , for R&D tax credit from the State of Georgia
and the United States Federal Government. The Company had $49 thousand of
payroll tax expense with no R&D tax credit due to timing of the credit during
the three months ended June 30, 2022 .
9
During the three months ended June 30, 2022 , there was a $193 thousand or
160.00% increase in legal and professional services fees and other listing fees
related to the listing of the Company's Class A Common Stock on the Nasdaq
Capital Market and related initial SEC filings. Additionally, during the three
months ended June 30, 2021 , there was a $272 thousand increase in business
development activities due to hiring three seasoned commercial team members
including a former Vice President of Mastercard as Trust Stamp's Chief
Innovation Officer. There was also an increase in SG&A of $81 thousand or
increase from commercial-related travelling costs because of the COVID-19-era
travel restrictions lifting, freeing up executive and sales staff to travel to,
among others, events, industry and investor conferences.
Finally, the remainder of the increase in SG&A expenses from the three months
ended June 30, 2021 to the three months ended June 30, 2022 was driven mostly
was driven mostly by the increase in SG&A FTE and associated overhead for the
three months ended June 30, 2021 compared to the three months ended June 30,
2022 .
Depreciation and amortization
Three months ended June 30,
2022 2021 $ Change % ChangeDepreciation and amortization$ 190,703 $ 152,171 $ 38,532
25.32 %
Depreciation and amortization ("D&A") increased by $38 thousand , or 25.32% for
the three months ended June 30, 2022 , compared to the three months ended
June 30, 2021 . Driving the increase is the variance in software depreciation
expense due to the $227 thousand and $138 thousand in capitalized internal-use
software from 2016 and 2017, respectively, reaching the completion of its 5 year
useful life during the three months ended June 30, 2021 and 2022, respectively.
The completion of the capitalized internal-use software amortization was offset
by $227 thousand and $396 thousand in software costs added to capitalized
internal-use software after June 30, 2021 .
Despite a minor increase to capitalized internal-use software amortization
expense, we continue to see a trend of increasing software capitalization. The
development of new software has resulted in additional capitalized internal-use
software amortization, or microservices, that once reaching technical
feasibility, the Company begins to capitalize and subsequently amortize the
related costs over a period of 5 years. In addition, patent amortization
increased during the three months ended June 30, 2022 as a result of new pending
patent applications and issued patents with the United States Patent and
Trademark Office. During the six months ended June 30, 2022 , the Company added
eleven new pending patents and eight issued patents.
Operating loss
Three months ended June 30,
2022 2021 $ Change % Change
Operating loss $ (2,937,920 ) $ (2,048,982 ) $ (888,938 ) (43.38 )%
Operating Loss increased by $889 thousand , or 43.38% for the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 . The increase was
primarily due to an increase in SG&A and R&D expenses.
Interest income (expense)
Three months ended June 30,
2022 2021 $ Change % Change
Interest income (expense) $ (2,354 ) $ (7,829 ) $ 5,475 69.93 %
Interest income (expense) decreased by$5 thousand , or 69.93% for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . During the three monthsJune 30, 2022 and 2021 there was a total of$4 thousand and$8 thousand interest expense, respectively. The decrease in interest expense is due to the SCV note settlement inApril 2021 . During the three monthsJune 30, 2022 and 2021 interest income totaled$2 thousand and$0 , respectively. The interest earned during the three months endedJune 30, 2022 is a result of interest earned on cash accounts. 10
Change in fair value of warrant liability
Three months ended June 30,
2022 2021 $
Change % Change
Change in fair value of warrant liability
-
The Company recognized a change in fair value of warrant liability during the
three months ended June 30, 2022 , of $36 thousand based on the fair value
assessment and adjustment for one warrant liability as described in Note 4 to
the financial statements provided under Item 1 of this report.
Grant income
Three months ended June 30,
2022 2021 $ Change % Change
Grant income $ - $ 54,557 $ 54,557 -
Grant income during the three months ended June 30, 2021 relates to $55 thousand
received under the Business Development and Continuity Scheme secured by the
Company's subsidiary, Trust Stamp Malta. This agreement with the Republic of
Malta is described in more detail in Note 12 to the financial statements,
provided under Item 1 of this report. During the three-month ended June 30, 2022
there was no grant income recorded.
Impairment of digital assets
Three months ended June 30,
2022 2021 $Change % Change
Impairment of digital assets $ (23,885 ) $ - $ (23,885 ) -
The Company recognized an impairment on digital assets during the three months
ended June 30, 2022 of $24 thousand . Digital assets are considered
indefinite-lived intangible assets under applicable accounting rules.
Accordingly, any decrease in their fair values below our carrying values for
such assets at any time subsequent to their acquisition requires recognition of
impairment.
Other income
Three months ended June 30,
2022 2021 $ Change % Change
Other income
Other income decreased by$30 thousand for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . The other income decrease was driven by realized exchange differences related to foreign currency transactions. The three months endedJune 30, 2021 includes exchange gains of$26 thousand for external invoices billed in foreign currency. During the three months endedJune 30, 2022 the Company recognized an exchange loss that is included in other expense. 11 Other expense Three months ended June 30, 2022 2021 $ Change % Change Other expense$ (272 ) $ -$ (272 ) % Other expense increased by$272 for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . In the second quarter of 2022, the Company determined that there is currently no intention to settle intercompany accounts in the foreseeable future; therefore, future fluctuations in foreign currencies between the Company and its subsidiaries will be booked to Accumulated other comprehensive income on the balance sheet
Comparison of the Six Months Ended
Net revenue
Six months ended June 30,
2022 2021 $Change % Change
Net revenue $ 3,529,333 $ 1,251,692 $ 2,277,641 181.96 %
During the six months ended June 30, 2022 , net revenue increased by $2.28
million , or 181.96% compared to the six months ended June 30, 2021 . This
increase was primarily due to the $3,920,764 ICE Contract for an alternative to
detention program, which was subsequently modified to $7,176,364 , effective
March 27th, 2022 . During the six months ended June 30, 2022 , the Company booked
$2.44 million related to the ICE Contract. Refer to the Liquidity and Capital
Resources subsection below for an expanded discussion of the 90-day and 60-day
cessation as well as termination of the ICE Contract. Additionally, the Company
booked $1.09 million in non-ICE revenue, $550 thousand from a S&P500 bank, a
statement of work ("SOW") from Mastercard for $329 thousand , $114 thousand from
FIS, and the remaining $98 thousand from various other new SOWs. There were no
ICE revenues recorded during the six months ended June 30, 2021 .
Cost of services
Six months ended June 30,
2022 2021 $Change % Change
Cost of services $ 1,042,144 $ 604,013 $ 438,131 72.54 %
Cost of services provided increased by$438 thousand , or 72.54% for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . The increase during the six months endedJune 30, 2022 was primarily driven by the ICE Contract which the Company executed in the third quarter of 2021, which was subsequently modified effectiveMarch 27th, 2022 . During the six months endedJune 30, 2022 , the Company booked$340 thousand in labor and third-party carrier costs related to servicing the requirements of the ICE Contract, which was offset by a decrease of$77 thousand in stock-based compensation and$108 thousand in costs to service the FIS contract that did not recur in the six months endedJune 30, 2022 . Additionally, gross profit during the comparative periods increased significantly by 284.02% or$1.84 million from$647 thousand for the six months endedJune 30, 2021 , to$2.49 million for the six months endedJune 30, 2022 . Gross margins improved by 18.73% from 51.74% for the six months endedJune 30, 2021 , to 70.47% for the six months endedJune 30, 2022 . Research and development Six months ended June 30, 2022 2021 $Change % Change Research and development$ 1,022,903 $ 483,819 $ 539,084 111.42 %
Research and development ("R&D") increased by $539 thousand , or 111.42% for the
six months ended June 30, 2022 , compared to the six months ended June 30, 2021 .
The increase in R&D expenses during the six months ended June 30, 2022 , was
driven by a larger portion of the developer activities focused on customer
implementations and/or developing new technology services as a result of newly
approved intellectual property patents.
12
Selling, general, and administrative
Six months ended June 30,
2022 2021
$Change % Change
Selling, general, and administrative
Selling, general, and administrative expense ("SG&A") increased by $1.82
million , or 47.07% for the six months ended June 30, 2022 , compared to the six
months ended June 30, 2021 . The increase during the six months ended June 30,
2022 was driven mostly by the $645 thousand increase in legal and professional
services fees and other fees related to the listing of the Company's Class A
Common stock on the Nasdaq Capital Market. Additionally, the Company incurred
$426 thousand in sales commissions in the six months ended June 30, 2022
compared to $47 thousand during the three months ended June 30, 2021 ; an
increase of $380 thousand or 813.26%. The increase in commissions paid during
the six months ended June 30, 2022 is directly related to the substantial
increase in cash received on revenue contracts during the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 , and include
commissions paid on the customer comments with ICE, FIS, and other customer.
Other notable variances during the six months ended June 30, 2022 include an
increase of $240 thousand for management consulting and training with the Disney
Institute and a $157 thousand increase for four additional business development
team members including a former VP at Mastercard, who has taken the role of
Chief Innovation Officer.
Depreciation and amortization
Six months ended June 30,
2022 2021 $Change % Change
Depreciation and amortization
25.95 %
Depreciation and amortization ("D&A") increased by $71 thousand , or 25.95% for
the six months ended June 30, 2022 , compared to the six months ended June 30,
2021 . Driving the increase in software depreciation expense was due to the $227
thousand and $23 thousand in capitalized internal- use software from 2016 and
2017, respectively, reaching the completion of its 5-year useful life during the
three months ended June 30, 2021 and 2022, respectively. The completion of those
capitalized internal-use software amortization was offset by $227 thousand and
$396 thousand in capitalized internal-use software costs after June 30, 2021 .
Operating loss
Six months ended June 30,
2022 2021 $Change % Change
Operating loss
Operating Loss increased by$594 thousand , or 14.92% for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily due to an increase in SG&A expenses and R&D expenses. Interest income (expense) Six months ended June 30, 2022 2021 $Change % Change Interest income (expense)$ (6,312 ) $ (40,049 ) $ 33,737 84.24 %
Interest income (expense) increased by$34 thousand , or 84.24% for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . Other income was primarily made up of ancillary fees from investments in the 2021 public raise received during the six months endedJune 30, 2022 . The remaining net interest expense relates to various immaterial interest-bearing and interest-earning accounts. 13
Change in fair value of warrant liability
Six months ended June 30,
2022 2021 $Change
% Change
Change in fair value of warrant liability
-
The Company recognized a change in fair value of warrant liability during the
six months ended June 30, 2022 , of $77 thousand based on the fair value
assessment and adjustment for one warrant liability as described in Note 4 to
the financial statements provided under Item 1 of this report.
Grant income
Six months ended June 30,
2022 2021 $ Change % Change
Grant income $ - $ 51,293 $ 51,293 -
Grant income during the six months ended June 30, 2021 , relates to $51 thousand
received in grant income that the Company's subsidiary, Trust Stamp Malta,
entered with the Republic of Malta that would provide for a grant of up to €200
thousand as reimbursement for operating expenses over the first 12 months
following incorporation in the Republic of Malta with the Republic of Malta
described in Note 12 to the financial statements provided under Item 1 of this
report. During the six-month ended June 30, 2022 , there was no grant income
recorded.
Impairment of digital assets
Six months ended June 30,
2022 2021 $ Change % Change
Impairment of digital assets $ (23,885 ) $ - $ (23,885 ) -
The Company recognized an impairment on digital assets during the six months
ended June 30, 2022 , of $24 thousand . Digital assets are considered
indefinite-lived intangible assets under applicable accounting rules.
Accordingly, any decrease in their fair values below our carrying values for
such assets at any time subsequent to their acquisition requires recognition of
impairment.
Other income
Six months ended June 30,
2022 2021 $ Change % Change
Other income $ 12,614 $ 10,806 $ 1,808 16.73 %
Other income increased by $2 thousand for the six months ended June 30, 2022 ,
compared to the six months ended June 30, 2021 . The increase was primarily due
to ancillary fees from investments in the 2021 public raise received during the
six months ended June 30, 2022 .
Other expense
Six months ended June 30,
2022 2021 $ Change % Change
Other expense $ (94,785 ) $ (36,185 ) $ (58,600 ) (161.94 )%
14
Other expense increased by
During the six months endedJune 30, 2021 , there was an unrealized loss on foreign currency translations that is recorded to other income for foreign currencies held by the Company's subsidiaries to meet expenses denominated in those currencies, theU.S. dollar cost of which expenses has fallen commensurately, therefore the unrealized loss will have no cash impact until the accounts are settled. In the second quarter of 2022, the Company determined that there is currently no intention to settle intercompany accounts in the foreseeable future; therefore, future fluctuations in foreign currencies between the Company and its subsidiaries will be booked to Accumulated other comprehensive income on the balance sheet.
Liquidity and Capital Resources
As ofJune 30, 2022 andDecember 31, 2021 , we had approximately$2.83 million and$3.48 million cash in our banking accounts, respectively. The decrease in cash fromDecember 31, 2021 toJune 30, 2022 was a result of the net negative cash inflow from the combination of financing and operating activities which were$4.38 million during the six months endedJune 30, 2022 compared to$4.47 million during the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , Contributor to the cash outflows increase include$329 thousand for AT&T carrier fees and$360 thousand in sales commissions related to the ICE Contract,$200 thousand NASDAQ listing fee,$468 thousand in a cash bonus to meet the Company's commitment to pay taxes on behalf of employees for their 2019 stock bonuses, and$240 thousand to theDisney Institute for management consulting. Total current assets for the comparative periods decreased by 25.36% or$1.46 million from$5.76 million as ofDecember 31, 2021 , to$4.30 million during the six months endedJune 30, 2022 . The current assets decrease was primarily driven by the decrease in cash (discussed above), accounts receivable, and prepaid expenses and other current assets. Accounts receivable decreased by$540 thousand from$1.28 million as ofDecember 31, 2021 to$739 thousand as ofJune 30, 2022 primarily due to the cessation of the ICE Contract billings. Additionally, there was a decrease in current liabilities of 43.15% or$1.36 million atJune 30, 2022 , compared to$2.40 million as ofDecember 31, 2021 . In effect, the Company's current ratio, that is, the ratio of the Company's total current assets as a multiple of total current liabilities or the Company's ability to service its current liabilities with its current cash assets, grew from 2.40 as ofDecember 31, 2021 , to 3.15 as ofJune 30, 2022 . This is a result of a decrease of cash and increase of current cash inflow from operating and financing activities and a reduction of current liabilities. The conversion of deferred revenue and customer deposit liabilities into revenue, coupled with the payment of the above-mentioned cash bonus for the 2019 stock bonuses were the primary drivers for the decrease in current liabilities as ofJune 30, 2022 , compared toDecember 31, 2021 . Various SOWs that existed as deferred revenue as ofDecember 31, 2021 , included$104 thousand received in cash in relation to the Mastercard License fee,$108 thousand for FIS, and$105 thousand for IJM. Customer deposit liabilities as ofDecember 31, 2021 , included deferred revenue related to the ICE Contract. Since there is a provision in government contracts which provides for termination on convenience, the Company reclassed this amount to customer deposit liabilities. During the six months endedJune 30, 2022 , the Company converted this entire balance to recognized revenue. EffectiveSeptember 3, 2019 , the Company entered into a software license agreement with a customer pursuant to which the Company received total fees of$150 thousand in 2020,$200 thousand in 2021, and will receive minimum total fees of$250 thousand in 2022, rising by 15% in each subsequent year beginning in 2023 with a cap of$1.00 million . The Company has recognized$125 thousand of the software license agreement fees during the six months endedJune 30, 2022 . 15 OnMarch 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 onApril 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, onApril 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 onJune 4, 2021 with$82 thousand of reserved investment at$3.84 per share with the contracted sale of 21,400 shares of Class A Common Stock. OnAugust 25, 2021 , the Company launched concurrent offerings under Regulation Crowdfunding ("Regulation CF"), Regulation D and RegulationS. The Company initially sought to raise up to$5.00 million in the aggregate between the three offerings through the sale of units but had the discretion to accept up to$5.00 million in each offering. Each unit consists of 1 share of the Company's Class A Common Stock, par value$0.01 per share, and 1 warrant to purchase 1 share of Class A Common Stock of the Company in a future registered or exempt offering of the Company (i.e. a Regulation CF, Regulation D, or Regulation S Warrant, as applicable). The minimum target amount under the Regulation CF offering was$100 thousand , which the Company achieved. OnNovember 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 toNovember 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. OnDecember 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 . OnDecember 21, 2021 , a SCV executed a Notice of Exercise for certain of its warrants to purchase 2,037,560 shares of Class A Common Stock at an exercise price of$1.6000 per share for a total purchase price of$3.3 million . OnJanuary 7, 2022 , we closed on an initial tranche of investments from the Regulation D offering. We raised a final total of$863,956 in gross proceeds from the issuance of 215,989 Regulation D units to investors in this offering. We conducted an additional close onFebruary 2, 2022 , receiving gross proceeds of$100,000 and issuing 25,000 Regulation D units to that investor. OnJanuary 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.
OnJanuary 26, 2022 , we initially qualified an offering with theSecurities and Exchange Commission under Regulation A to allow for the exercise of warrants issued pursuant to the Regulation CF, Regulation D, and Regulation S unit offerings. As ofJune 30, 2022 , warrants for 14,250 shares have been exercised for$57 thousand by investors.
On
Executed onApril 5, 2022 , and made effectiveMarch 27, 2022 , Trust Stamp agreed to a modification of the ICE Contract, increasing the total contract award value to$7,176,364 from the original$3,920,764 and extending the delivery period untilSeptember 26, 2022 (subject to a right of early termination by ICE). However, due to a recent change in legislation (enacted through H.R. 2471: Consolidated Appropriations Act, 2022) which requires a Congressional notification in order for ICE to award a contract or subcontract to a particular entity for any pilot or demonstration program that uses more than 5 full-time equivalents or costs in excess of$1,000,000 , effectiveApril 15, 2022 , the Company entered into an Amendment with ICE to amend the terms of the ICE Contract, implementing an up to 90-day cessation of performance of the Company's and ICE's obligations under the ICE Contract. This change in legislation was retroactively applied to theMarch 27, 2022 , modification to the ICE Contract. The up to 90-day cessation of the ICE Contract provided by the Amendment was intended to allow ICE ample time to complete a Congressional notification for the modification of the ICE Contract, so that the Company could continue to provide services to ICE under the ICE Contract. However, as ofJuly 15, 2022 (the end of the 90-day cessation period), ICE had not yet been able to complete such a Congressional notification. 16 OnJuly 15, 2022 , the Company entered into a second amendment agreement with ICE to amend the terms of the ICE Contract (as modified onMarch 27, 2022 . The second amendment had the effect of implementing an additional up to 60-day cessation of performance of the Company's and ICE's obligations under the ICE Contract previously agreed to be performed betweenMarch 27, 2022 , andSeptember 26, 2022 . Furthermore, this second amendment was intended to provide ICE additional time to complete such a Congressional notification, so that the Company could continue to provide services to ICE under the ICE Contract. During the cessation period, Trust Stamp continued to incur maintenance costs specific to theApril 5, 2022 modification contract, without recognizing or receiving the revenue, in order that we could be positioned to restart immediately if and
when the cessation was lifted. OnAugust 17, 2022 , Trust Stamp received notification from ICE for termination of the ICE Contract, for convenience, effective immediately. ICE has indicated that it will pay to Trust Stamp compensation for cancellation on a basis to be agreed upon. The Company expects that human resources costs - i.e., compensation for new and existing officers, directors, and employees - will be the largest material cash obligation for the Company within the next twelve months, with projected human resources costs totaling approximately$639 thousand per month, a reduction from$750 thousand per month as reported as atMarch 31, 2022 . The Company believes, as described above, that revenues from its existing operations will be sufficient to cover these costs, and that any funds from new client contracts or offerings would provide additional operational capacity for the Company going forward. Going Concern The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a business that has not yet generated profits, with a loss in the six months endedJune 30, 2022 of$4.61 million , operating cash outflows of$3.86 million for the same period, and an accumulated deficit of$31.82 million as ofJune 30, 2022 . The Company's ability to continue as a going concern in the next twelve months following the date the consolidated financial statements were available to be issued is dependent upon its ability to produce revenues and/or obtain financing sufficient to meet current and future obligations and deploy such to produce profitable operating results. Refer to Note 14 for an expanded discussion of the 90-day cessation, subsequent 60-day cessation, and eventual termination of the ICE renewal. Management has evaluated these conditions and plans to generate revenue and raise capital as needed to satisfy its capital needs. While the negotiation of significant additional revenue is well advanced, it has not reached a stage that allows it to be factored into a going concern evaluation. In addition, although the Company has previously been successful in raising capital as needed and has already made plans to do so as well as restructuring expenses to meet the Company's cash needs, no assurance can be given that the Company will be successful in its capital raising efforts. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period. Equity, Notes, and Warrants Regulation D, Regulation S and Regulation CF Offerings. See more information on Regulation D, Regulation S, and Regulation CF fundraising efforts, as well as exercise of warrants by existing warrant holders of the Company, in the Liquidity and Capital Resources subsection above. Operating Activities
Net cash used in operating activities decreased by 3.08% from$3.98 million for the six months endedJune 30, 2021 to$3.86 million for the six months endedJune 30, 2022 . Of the$4.61 million net loss for the six months endedJune 30, 2022 , there was a non-cash expense of$747 thousand related to an accounting estimate used to calculate stock-based compensation, decrease in warrant liability of$77 thousand , repayment of shareholder loan through in-kind services of$56 thousand , digital asset impairment of$24 thousand , and$345 thousand for depreciation and amortization that was added back to net loss. Additionally,$339 thousand from the timing of accrual was subtracted from net loss to arrive at a$3.86 million cash outflow from operating activities. 17 Investing Activities Net cash used in investing activities for the six months endedJune 30, 2022 was$524 thousand , compared to net cash of$484 thousand used in the six months endedJune 30, 2021 . Cash used in investing activities for the six months endedJune 30, 2022 and 2021 were related primarily to continued investments to develop future technologies that we intend to capitalize and monetize over time. During the six months endedJune 30, 2022 , capitalized internal-use software increased by 26.96% compared the six months endedJune 30, 2021 . This is also a result of the Company's investments in R&D, which, during the six months endedJune 30, 2022 , produced eleven new pending patent applications and eight issued patents with the United States Patent and Trademark Office. During the six months endedJune 30, 2021 , we completed an acquisition ofPixelpin Ltd (completed onMarch 18, 2021 ), in exchange for$91 thousand in cash.Pixelpin Ltd is an image-based "Pin-on-Glass" account access solution that alleviates pain-points of traditional login methods while ensuring the security of authentication. This acquisition further enhances Trust Stamp's innovative portfolio of technology solutions that enable improved customer experiences and reputation while broadening the scope of internal risk-management strategies and providing additional options for multi-factor authentication. Financing Activities For the six months endedJune 30, 2022 , net cash provided by financing activities was$3.69 million , compared to net cash of$4.18 million for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , cash received included the$3.38 million from a warrant exercise received inDecember 2021 from SCV and REach® Ventures,$72 thousand from the exercise of options,$259 thousand in units sold and warrants exercised in connection to the Company's 2021 raises under Regulation CF, Regulation D, and Regulation S in preparation for our Nasdaq listing, and an offset of$30 thousand for principal payments made for the financial liability. During the six months endedJune 30, 2021 , cash received primarily related to our private fundraise underSEC Regulations D and Regulation S, from which the Company closed$3.97 million in net proceeds. Additionally, the Company received$548 thousand in proceeds from a soft loan, a potentially repayable loan, from the government ofMalta .
Contractual Obligations and Commitments
The following table summarizes our non-cancellable contractual obligations as ofJune 30, 2022 : Payments Due by Period Less Than Total 1 Year 1-3 Years 3-5 Years Operating lease obligations$ 729,681 $ 249,415 $ 477,668 $ 2,598 Purchase obligations 267,142 59,460 207,682 -
Total contractual obligations
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
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.
18
Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no substantive plans to market such software at the time of development are capitalized. The Company capitalizes eligible costs to develop internal-use software that are incurred subsequent to the preliminary project stage through the development stage. These costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Costs incurred during the preliminary project stage and during the post-implementation operational stage are expensed as incurred. Maintenance costs are expensed as incurred. The estimated useful life of costs capitalized is evaluated for each specific project. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore changes in amortization expense in future periods. Revenue Recognition The Company derives its revenue primarily from professional services. Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, the Company includes an estimate of the amount it expects to receive or the total transaction price if it is probable that a significant reversal of cumulative revenue recognized
will not occur.
The Company determines the amount of revenue to be recognized 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 endedDecember 31, 2021 , the Company entered into a significant contract with ICE that contained multiple performance obligations, including software application development, mobile hardware, and services to assist ICE.The Company allocates the transaction price for this contract based on the stand-alone selling price of each performance obligation. The Company uses the expected cost-plus margin approach for determining the stand-alone selling prices of the mobile hardware and services to assist ICE, as this is believed to be the most accurate method of allocating the transaction price to these performance obligations, maximizing the use of observable inputs. As the Company does not have a similar software application that has been sold to another customer, the Company uses the residual approach for determining the stand-alone selling price of the software application development by subtracting the sum of the stand-alone selling prices for the mobile hardware and services to assist ICE from the total transaction price. Executed onApril 5, 2022 , and made effectiveMarch 27, 2022 , Trust Stamp agreed to a modification of this contract with ICE, increasing the total contract award value to$7,176,364 from the original$3,920,764 and extending the delivery period untilSeptember 26, 2022 (subject to a right of early termination by ICE). However, due to a recent change in legislation (enacted through H.R. 2471: Consolidated Appropriations Act, 2022) which requires a Congressional notification in order for ICE to award a contract or subcontract to a particular entity for any pilot or demonstration program that uses more than 5 full-time equivalents or costs in excess of$1,000,000 , effectiveApril 15, 2022 , the Company entered into an amendment with ICE to amend the terms of the ICE Contract, implementing an up to 90-day cessation of performance of the Company's and ICE's obligations (the "Amendment"). This change in legislation was retroactively applied to theMarch 27, 2022 , modification to the ICE Contract. The up to 90-day cessation of the ICE Contract provided by the Amendment was intended to allow ICE ample time to obtain a Congressional notification for the modification of the ICE Contract, so that the Company could continue to provide services to ICE under the ICE Contract. During the cessation period, Trust Stamp continued to incur maintenance costs specific to theApril 5, 2022 modification contract, without recognizing or receiving the revenue, in order that we could be positioned to restart immediately if and when the cessation is lifted. Refer to the Liquidity and Capital Resources subsection below for an expanded discussion of the 90-day and 60-day cessation as well as termination of the
ICE
Contract.
19
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.
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. The Company elected to apply the practical expedient
in accordance with ASC 340, which allows the Company to expense commissions as
incurred when the contract term is twelve months or less in total.
Warrants
The Company accounts for stock warrants as either equity instruments, derivative
liabilities, or liabilities in accordance with ASC 480, Distinguishing
Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC
815"), depending on the specific terms of the warrant agreement.
Stock- Based Compensation
The Company accounts for its stock-based compensation arrangements at fair
value. Fair value of each option grant is estimated on the date of grant using
either the Black-Scholes-Merton Model for stock options granted or using the
fair value of a common stock for grants and restricted stock units. The
calculated fair value is recognized as an expense over the requisite service
period, net of estimated forfeitures, using the straight-line method.
Income 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.
20
A valuation allowance is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for a valuation allowance. The Company's tax positions are subject to income tax audits by multiple tax jurisdictions. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not, that the position will be sustainable upon examination by the taxing authority, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. The Company makes adjustments to these reserves in accordance with the income tax guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company's financial condition and operating results.
Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, refer to Note 1. Description of Business and Summary of Significant Accounting Policies in our condensed consolidated financial statements included elsewhere under Item 1
in this report. As a Nasdaq listed public reporting company, we are required to publicly report on an ongoing basis as an "emerging growth company" (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an "emerging growth company", we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not "emerging growth companies", including but
not limited to:
· not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act;
· taking advantage of extensions of time to comply with certain new or revised
financial accounting standards;
· being permitted to comply with reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements; and
· being exempt from the requirement to hold a non-binding advisory vote on
executive compensation and shareholder approval of any golden parachute payments not previously approved. We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We may remain an "emerging growth company" for up to five years, beginningJanuary 26, 2022 , although if the market value of our Common Stock that is held by non-affiliates exceeds$700 million as of anyJune 30 before that time, we would cease to be an "emerging growth company" as of the followingDecember 31 . In summary, we are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not "emerging growth companies" and therefore, our shareholders could receive less information than they might expect to receive from more mature public companies. 21
© Edgar Online, source
