T Stamp Inc. (Trust Stamp) — Q3 2021 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2021. Trust Stamp develops artificial-intelligence, biometric, cryptographic and identity-authentication software for fraud prevention, KYC/AML, financial inclusion, government and other applications. The company reports one operating segment and completed a 5-for-1 forward stock split on August 18, 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $330,104 | $356,690 | $1,581,796 | $1,413,230 |
| Gross profit | $80,747 | $225,808 | $728,426 | $945,853 |
| Gross margin | 24.5% | 63.3% | 46.1% | 66.9% |
| Operating loss | $(2,939,301) | $(1,651,288) | $(6,924,152) | $(3,515,811) |
| Net loss attributable to T Stamp | $(3,035,904) | $(1,689,262) | $(7,033,821) | $(5,033,330) |
| Basic and diluted loss per share | $(0.16) | $(0.15) | $(0.37) | $(0.49) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(5,270,458) | $(3,472,114) |
- Revenue consisted primarily of professional services, with license fees of $50,000 in Q3 and $150,000 for the nine-month period.
- Cash and cash equivalents were $173,879 at September 30, 2021, down from $1.47 million at December 31, 2020.
- Total current assets were $932,377 versus current liabilities of $1.83 million, resulting in negative working capital of approximately $896,000.
- Total liabilities were $3.04 million, including $866,760 of non-current non-convertible notes payable and a $342,122 warrant liability. No convertible notes or SAFE liabilities remained outstanding.
- Total stockholders’ equity was $938,075, compared with $2.07 million at year-end 2020. The accumulated deficit was $25.18 million.
- Net cash used in investing activities was $631,945, including $368,643 of capitalized software development, $90,621 for the Pixelpin acquisition and $138,780 for patent costs.
- Net cash provided by financing activities was $4.53 million, including $4.00 million from common-stock issuance and $858,589 from a Maltese government loan, partially offset by $345,000 of debt repayment.
Material changes versus the prior comparable period
- Q3 revenue declined 7.5%, while nine-month revenue increased 11.9%, reflecting timing of revenue recognition, replacement or expansion of statements of work and new customers.
- Q3 cost of services increased 90.5%, reducing gross margin to 24.5%. Nine-month cost of services increased 82.6%, and nine-month gross margin declined to 46.1% from 66.9%.
- Q3 research and development expense increased 101.3% and selling, general and administrative expense increased 54.0%. For the nine-month period, the increases were 41.9% and 81.5%, respectively.
- The company expanded its Malta R&D workforce from 15 to 39 full-time equivalents and established a Rwanda R&D center with 11 full-time equivalents. Management expects internal development to reduce per-hour development costs versus third-party contractors, but the near-term effect was higher expenses.
- Stock-based compensation increased to $1.72 million for the nine-month period from $274,000, including $1.07 million related to restricted stock units.
- The operating loss nearly doubled for the nine-month period, increasing 97.6% to $6.92 million. Net loss increased 39.7% to $7.03 million, although the prior period included $1.41 million of warrant expense that did not recur.
- Cash declined by $1.30 million during the nine months despite $4.53 million of financing inflows, because operating and investing cash outflows totaled approximately $5.90 million.
Guidance, outlook, risks and unusual items
- Management stated that a $3.92 million U.S. Immigration and Customs Enforcement contract was awarded on September 23, 2021, with services beginning September 27, 2021. The filing does not provide a forecast of the amount or timing of revenue recognition from this contract.
- Management cited existing customer relationships, potential pay-per-use revenue from Mastercard Community Pass and future contracts as growth opportunities. No formal revenue or profitability guidance was provided.
- The company stated that projected human-resources costs were approximately $750,000 per month and believed existing operations, together with financing proceeds, would support near-term operations. The filing nevertheless identifies dependence on additional revenue and financing and substantial continuing losses.
- Customer concentration remained significant: two customers represented approximately 95% of Q3 revenue, while three customers represented approximately 97% of nine-month revenue.
- The financial statements were prepared on a going-concern basis. Management asserted that subsequent financing provided sufficient liquidity for 12 months from issuance of the financial statements, but the company had limited cash, negative working capital and a large accumulated deficit at September 30, 2021.
- Subsequent to quarter-end, the company reported additional offerings totaling approximately $5.55 million of gross proceeds, warrant exercises generating approximately $3.33 million and the commencement of Nasdaq trading on January 31, 2022. These proceeds were not available at September 30, 2021.
- Operating lease obligations totaled $701,332, including $151,102 due within one year. The filing reports no material pending or threatened litigation.
- The filing contains an inconsistency regarding nine-month operating cash flow: the cash-flow statement reports $(5.27) million, while one liquidity discussion references $(3.47) million. The financial statements should be treated as the primary source.
Important facts for investors to verify
- Verify the timing, revenue-recognition terms, renewal risk and remaining obligations under the $3.92 million ICE contract.
- Assess whether customer concentration and reliance on statements of work could materially affect revenue.
- Reconcile cash burn, projected monthly human-resources costs and the company’s ability to fund operations without additional financing.
- Review the terms, maturity and repayment obligations of the $858,589 Maltese government loan and the $342,122 warrant liability.
- Evaluate dilution from approximately 1.93 million outstanding options, approximately 7.27 million warrants and other equity-linked instruments, as well as the subsequent financing offerings.
- Determine whether capitalized software, goodwill and other intangible assets are recoverable given continuing losses and limited cash.
- Confirm the final proceeds and share counts from the post-quarter-end Regulation CF, Regulation D and Regulation S offerings, which are described inconsistently in portions of the filing.