T Stamp Inc: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the accompanying notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, as previously filed with the Commission. 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 was incorporated under the laws of the State of Delaware on April 11, 2016 as “T Stamp Inc.” T Stamp Inc. and its subsidiaries (“Trust Stamp”, “we”, or the “Company”) develop and market identity authentication software for enterprise and government partners and peer-to-peer markets.

Trust Stamp develops proprietary artificial intelligence-powered identity and trust solutions at the intersection of biometrics, privacy, and cybersecurity, that enable organizations to protect themselves and their users while empowering individuals to retain ownership of their identity data and prevent fraudulent activity using their identity.

Trust Stamp tackles industry challenges including data protection, regulatory compliance, and financial accessibility, with cutting-edge technology including biometric science, cryptography, and machine learning. Our core technology irreversibly transforms identity information to create tokenized identifiers that enable accurate authentication without the need to store or share sensitive data. By retaining the usefulness of biometric-derived data while minimizing the risk, we allow businesses to adopt biometrics and other anti-fraud initiatives while protecting personal information from hacks and leaks.

Trust Stamp’s key sub-markets are identity authentication for the purpose of account opening, access, and fraud detection, the creation of tokenized digital identities to facilitate financial and societal inclusion, and in-community case management software for alternatives to detention and other governmental uses.

As biometric solutions proliferate, so does the need to protect biometric data. Stored biometric images and templates represent a growing and unquantified financial, security, and PR liability and are the subject of governmental, media, and public scrutiny since biometric data cannot be “changed” once they are hacked, as they are directly linked to the user’s physical features and/or behaviors. Privacy concerns around biometric technology have led to close attention from regulators, with multiple jurisdictions placing biometrics in a special or sensitive category of personal data and demanding much stronger safeguards around collection and safekeeping.

To address this unprecedented danger and increased cross-industry need to establish trust quickly and securely in virtual environments, Trust Stamp has developed its Irreversibly Transformed Identity Token, or IT2TM, solutions, which replace biometric templates with a cryptographic hash that can never be rebuilt into the original data and cannot be used to identify the subject outside the environment for which it is designed.

Trust Stamp’s data transformation and comparison technology is vendor and modality-agnostic, allowing organizations including other biometric services providers to benefit from the increased protection, efficiency, and utility of our proprietary tokenization process. With online and offline functionality, Trust Stamp technology is effective in even the most remote locations in the world.

Trust Stamp also offers end-to-end solutions for multi-factor biometric authentication for account access and recovery, KYC/AML compliance, customer onboarding, and more, which allow organizations to approve more genuine users, keep bad actors from accessing systems and services and retain existing users with a superior user experience.

Markets

Trust Stamp 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 of which are to be incorporated by reference:

Data Security and Fraud

• In 2022, 4,145 publicly disclosed breaches exposed over 22 billion records according to the “2021 Year End Report: Data Breach QuickView” published by Flashpoint.
• The cumulative merchant losses to online payment fraud between 2023 and 2027 will exceed $343 billion globally according to a 2022 report titled “Fighting Online Payment Fraud in 2022 & Beyond” published by Juniper Research.

Trust Stamp addresses this market with biometric identity verification and biometric authentication solutions — which offer Trust Stamp’s proprietary irreversible identity token to perform biometric-based matching in a secure and tokenized domain, matching tokenized personally identifiable information while implementing liveness detection.

Biometric Authentication

• By 2027, the value of biometrically authenticated remote mobile payments will reach $1.2 trillion globally, according to a 2022 report titled “Mobile Payment Biometrics” published by Juniper Research.
• The global biometric system market size is valued at $41.1 billion per annum in 2023, with a forecast compound growth of 20.4% from 2023 to 2030 with a 2030 revenue forecast of $150.6 billion according to the 2023 report titled “Biometric Technology Market Size, Share & Trends Analysis Report By Component, By Offering, By Authentication Type, By Application, By End-use, By Region, And Segment Forecasts, 2023 — 2030” published by Grand View Research.

Trust Stamp addresses this market through its biometric authentication and liveness detection products — which offer Trust Stamp’s proprietary irreversible identity token to perform biometric matching in a secure and tokenized domain. This permits biometric authentication without the risk of storing pictures and biometric templates.

In addition to identity authentication, the Company’s deep learning algorithms can be used to identify specific criteria from facial biometric captures and the Company has been developing and testing age-estimation software for the rapidly growing age verification market. The new age estimation software is expected to go live with a first commercial client in Q3 of 2024.

Financial and Societal Inclusion

• As of 2021, 1.4 billion people were unbanked according to the “Global Findex Database 2021” published by The World Bank.
• 131 million small and medium-sized enterprises in emerging markets lack access to finance, limiting their ability to grow and thrive (UNSGSA Financial Inclusion Webpage, Accessed March 2023).
• The global market for Microfinance is estimated at $157 Billion in the year 2020, and is projected to reach $342 billion by 2026 according to the 2022 report titled “Microfinance - Global Market Trajectory & Analytics” published by Global Industry Analysts, Inc.

Trust Stamp’s biometric authentication, liveness detection, and information tokenization enable individuals to verify and establish their identities using data derived from biometrics. While individuals in this market lack traditional means of identity verification, Trust Stamp provides a means to authenticate identity that preserves an individual’s privacy and control over that identity.

Alternatives to Detention (“ATD”)

• The ATD market includes Federal, State, and Municipal agencies for both criminal justice and immigration purposes. Trust Stamp addresses the ATD market with applications built on Trust Stamp’s privacy-preserving solutions allowing individuals to comply with ATD requirements using ethical and humane technology methodologies. Trust Stamp has developed innovative patented technologies for use in the ATD market encompassing biometrics, geolocation, and tokenization as well as a proprietary, tamper-resistant, battery-free “Tap-In-Band” that can complement or replace biometric check-in requirements and provide a lower-cost and more humane alternative to traditional “ankle bracelet” technology.

The Company is developing products and working with partners and industry organizations in other sectors that offer significant market opportunities, in particular, the IOT, global data management, healthcare, Metaverse platform and cryptographic key and account credential safekeeping sectors. For example, the Company has developed a “crypto key vault” solution that leverages proven facial biometric authentication and irreversible data transformation technology to protect private keys for digital assets while ensuring long-term data protection and access credential availability.

Principal Products and Services

Trust Stamp’s most important technology is the Irreversibly Transformed Identity TokenTM (also known as the IT2 TM, Evergreen HashTM, EgHashTM 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 three months ended March 31, 2024.

We adhere to the best practices outlined in the National Institute of Standards and Technology (“NIST”) and International Organization for Standardization (“ISO”) frameworks, and our policies and procedures in managing personally identifiable information (“PII”) comply with General Data Protection Regulation (“GDPR”) requirements wherever such requirements are applicable.

Key Customers

The Company’s initial business consisted of developing proprietary privacy-first identity solutions and then implementing them through custom applications built and maintained for a small number of key customers. In 2022, the Company added to its product offerings a modular and highly scalable SaaS model with low-code or no implementation (“the Orchestration Layer”). Although the Company remains open to significant opportunities to deliver custom solutions, sales of Orchestration Layer products are the primary focus of the Company’s sales and development initiatives. This strategic pivot in the Company’s go-to-market approach negatively impacted revenue in 2023 while we believe that it will substantially increase potential revenue in 2024 and thereafter.

Historically, the Company generated most of its income through two long-term partnerships, comprising a relationship with an S&P 500 bank with services provided pursuant to a Master Software Agreement entered into in 2017, together with a relationship with Mastercard International (“Mastercard”) with services provided under the terms of a ten-year technology services agreement entered into in March 2019 (the "TSA”). Both of those relationships remain strong, and the Company anticipates future revenue growth from the two relationships.

Under the TSA, IT2 TM 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. 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 user per year” basis for all transactions utilizing its technology. In December of 2022, the Company entered into a modification of the agreed pricing schedule with Mastercard to move from a per-use to a per-user-year model to broaden the range of potential use cases. The TSA may be terminated by either party in the event of a material breach by the other party that remains uncured within thirty days after notice is received of such a breach. Either party may terminate the TSA if the other party becomes, including, but not limited to, insolvent, subject to bankruptcy, dissolved, or liquidated. Unless the TSA is terminated, the TSA will automatically renew for additional one year-periods in perpetuity unless either party provides ninety days written notice of intent not to renew. To date, the Company has received guaranteed minimum annual payments on account of usage. According to the October 2023 interview of Mastercard Executive Vice President and Founder of the Community Pass from the article titled “Mastercard’s Community Pass founder says digital ID platform improving lives, digital inclusion” published by Biometric Update. Mastercard’s Community Pass program currently serves approximately 3.5 million users and is targeting 30 million users by 2027. Based upon information provided to us by Mastercard we anticipate user-based revenue starting in 2024 and growing year-on-year thereafter.

In 2022, the Company expanded its key customer base to include a relationship with FIS, a relationship focused upon the implementation of our Orchestration Layer and underlying technologies in FIS’ Global KYC product offering.

The Orchestration Layer is a low-code platform that is designed to be a one-stop shop for Trust Stamp services and provides easy integration to our products; chargeable on a per-use basis. The Orchestration Layer utilizes 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 facilitates no-code and low-code implementations of the Company’s technology making adoption and updating faster and cost-effective for a broader range of potential customers.

In the third quarter of 2022, the Company acquired its first 2 new customers on the Orchestration Layer through its partnership with FIS, and in the fourth quarter of 2022, 4 additional FIS customers onboarded. As of March 31, 2024, a total of 48 financial institutions with over $345 billion in assets have been onboarded via FIS, bringing the total number of (FIS and non-FIS) customers either fully implemented or are currently implementing the Orchestration Layer to 51. The first (non-FIS) client onboarded to the Orchestration Layer in the third quarter of 2022 has generated $286 thousand of revenue for the Company to date including $53 thousand during the three months ended March 31, 2024. Although each of the institutions onboarded via FIS pays a small onboarding fee, given the typical time taken by a financial institution to test, implement, and roll out any new technology, the Company does not anticipate any significant revenue from the new FIS customers until late in 2024.

Reinforced by the product-market fit indicated by the FIS roll-out, the Company is building an internal direct sales force to offer the Orchestration Layer to non-FIS institutions. A key criterion for the account executives recruited is possessing significant experience and a successful track record in the identity solutions market. This expansion into direct sales is a work-in-progress and the Company is dynamically adapting its approach based upon progress towards acceptable success metrics.

In Management's opinion, while the unanticipated loss of any one of our current customers, including our channel partnership with FIS, could have an adverse effect on the Company’s financial position, it would not prevent us from continuing our operations.

Key Business Measures

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

Adjusted EBITDA

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

Adjusted EBITDA is a non-GAAP financial measure that represents U.S. GAAP net income (loss) adjusted to exclude (1) other expense, (2) other income, (3) gain on sale of mobile hardware, (4) interest expense, (5) interest income, (6) stock-based compensation, (7) change in fair value of warrant liabilities (8) impairment of assets, (9) non-cash expenses for in-kind services, (10) depreciation, and (11) certain other items management believes affect the comparability of operating results.

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

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

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

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

Reconciliation of Net Loss to Adjusted EBITDA

Adjusted EBITDA loss (non-GAAP) for the three months ended March 31, 2024, increased by 3.69%, to $2.37 million from $2.28 million for the three months ended March 31, 2023. The overall increase in Adjusted EBITDA loss (non-GAAP) was driven primarily by the increase in Selling, general, and administrative expenses (as a result of bolstering our sales resources and bringing in-house technical positions that were previously outsourced) for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023. See “Results of Operations” below for further discussion on the drivers behind the increase in Adjusted EBITDA loss (non-GAAP) during the three months ended March 31, 2024.

Results of Operations

The following table summarizes our consolidated statements of operations for the three months ended March 31, 2024 and 2023:

Comparison of the Three Months Ended March 31, 2024 and 2023

Net revenue

During the three months ended March 31, 2024, Net revenue increased to $574 thousand, or a 25.08% increase from the Net revenue of $459 thousand for the three months ended March 31, 2023. During the three months ended March 31, 2024, the $574 thousand in Net revenue consisted of $327 thousand from an S&P 500 bank, $154 thousand from Mastercard, and various other customers for the remaining $92 thousand. The majority of the increase in the comparative periods results from an S&P 500 bank adopting the Orchestration Layer, which increased revenue by $216 thousand.

During the three months ended March 31, 2024, the Company generated $297 thousand total revenue from customers using the Orchestration Layer including implementing the Orchestration Layer platform for 34 new enterprise customers through FIS on the Software-as-a-Service (SaaS) platform. In comparison, during the three months ended March 31, 2023, the Company generated $58 thousand total revenue from Orchestration Layer customers. Since its launch in the third quarter of 2022, there have been 51 enterprise customers on the Orchestration Layer platform, including 48 financial institutions, as of March 31, 2024. Additionally, revenue from the Orchestration Layer's flagship enterprise customer grew 26.24% between the comparative periods as a result of transitioning and launching the customer on the Orchestration Layer platform. Orchestration Layer's flagship enterprise customer is already in full production and generating monthly recurring revenue with gross margins in excess of 83.44%. Finally, the Company's S&P 500 bank customer began its transition to an augmented version of the SaaS platform during the three months ended March 31, 2024.

The Orchestration Layer is designed to be a one-stop-shop for Trust Stamp services and provides for easy integration to our products; chargeable on a per-use basis and is accelerating the Company’s evolution from being exclusively a custom solutions provider to also offering a modular and highly scalable SaaS model with low-code implementation.

Cost of services

Cost of services (“COS”) increased by $78 thousand or 35.79% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase during this period was primarily driven by costs related to $42 thousand for the expansion of our proof of identity solutions using a third-party as required for proof of identity contracts. The solution was not considered a cost of sale until the third quarter of 2023, thus, there were no expenses for this solution during the three months ended March 31, 2023. In addition, the Company saw an increase in service requests during the three months ended March 31, 2024 from our S&P 500 Bank customer under existing statements of work.

Research and development

Research and development (“R&D”) expenses decreased by $181 thousand, or 28.55% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease in R&D expense during the three months ended March 31, 2024 was primarily driven by the decrease in outsourced software development as the Company continued to transition this work internally which results in cost savings as internal work is more cost effective. Comparatively, outsourced software development costs decreased by 64.66% when comparing the three months ended March 31, 2024 to the three months ended March 31, 2023. In both periods, R&D expenses mainly were related to R&D payroll and other R&D compensation expenses.

Selling, general, and administrative

Selling, general, and administrative expense (“SG&A”) increased by $522 thousand, or 26.49%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in SG&A expense was driven by a $604 thousand increase in salaries, stock-based compensation, payroll costs, and sales commissions during the three months ended March 31, 2024. Headcount increased by 2.41%, from 83 FTE for the three months ended March 31, 2023, compared to 85 FTE for the three months ended March 31, 2024 due to bolstering our sales resources and bringing in-house technical positions that were previously outsourced. Likewise, there was an increase of $249 thousand in SG&A during the three months ended March 31, 2024 due to the timing of stock-based compensation awards.

The increases in SG&A were offset by notable reductions in SG&A for the three months ended March 31, 2024 including a total reduction of $281 thousand in professional fees, management consulting and training, office rent, and costs related to carrying mobile hardware assets as direct result of the Company's recent non-personnel cost cutting initiative.

In both periods, SG&A expenses were primarily comprised of payroll and other compensation expenses to our Company's workforce.

Depreciation and amortization

Depreciation and amortization (“D&A”) decreased by $34 thousand, or 15.69% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The primary driver for the decrease in D&A relates to the Company selling mobile hardware in April 2023. As a result of the sale, there is $0 expense for mobile hardware depreciation during the three months ended March 31, 2024 and $30 thousand of expense for mobile hardware depreciation during the three months ended March 31, 2023.

Operating loss

The Company’s Operating loss increased by $270 thousand or 10.45% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in Operating loss was mostly related to the increase of $385 thousand or 12.66% rise in operating expenses as a result of bolstering our sales resources and bringing in-house technical positions that outpaced Net revenue growth.

Interest expense, net

Interest expense, net increased by $8 thousand, or 81.30% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.The increase in interest expense is primarily due to an increase of $5 thousand as a result of the Malta loan interest rate increasing from 4.5% for the three months ended March 31, 2023 to 6.5% for the three months ended March 31, 2024. Additionally, the Company recorded $4 thousand in interest expense during the three months ended March 31, 2024 for interest accrued on Malta's tax obligations. Interest earned decreased by $43 to $117 for the three months ended March 31, 2024 from $160 for the three months ended March 31, 2023.

Change in fair value of warrant liability

The Company recognized a gain in Change in fair value of warrant liability during the three months ended March 31, 2024 of $2 thousand compared to a loss of $1 thousand during the three months ended March 31, 2023. This change is based on the fair value assessment and adjustment for one warrant liability as described in Note 3 to the unaudited condensed consolidated financial statements provided under Item 1 of this report.

Other income

32

Other income increased by $149 thousand for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was primarily due to a $187 thousand gain from a settlement of a mobile hardware bill that was outstanding as of March 31, 2023, which we negotiated for a lower payment, and paid during the three months ended March 31, 2024.

Other expense

Other expense increased by $6 thousand for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The Company incurred $6 thousand in unrealized loss on foreign currency translation expense for the three months ended March 31, 2024, for intercompany transactions between the parent company, T Stamp Inc., and its subsidiaries, Trust Stamp Rwanda Limited with currencies denominated in United States Dollars and Rwandan Franc, respectively.

Liquidity and Capital Resources

As of March 31, 2024, the Company had approximately $817 thousand cash in its banking accounts. The Company is generating revenues, but has not yet generated profits, with a net loss for the three months ended March 31, 2024 of $2.68 million, Net operating cash outflows of $2.16 million for the same period, and an accumulated deficit of $53.53 million as of March 31, 2024. The Company is not currently generating sufficient amounts of cash to meet its requirements for the next 12 months. The Company anticipates that it will need to raise capital from equity and/or debt financings within the next six (6) months in order to fund its operations.

Subsequent Investment and Pro Forma Balance Sheet

On April 1, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with the Selling Stockholder. Pursuant to the terms of the SPA, the Selling Stockholder agreed, at the closing of the SPA (the “Closing”) and upon the terms and subject to the conditions set forth in the SPA, to purchase from the Company 499,990 shares of Class A Common Stock, par value $0.01 of the Company, and pre-funded warrants to purchase 1,500,010 shares of Class A Common Stock of the Company at a purchase price of $0.968 per share ( “Warrant A”) for a total purchase price of $1,936,000.

Additionally, pursuant to the SPA, as additional consideration for the share and Warrant A purchase described above, the Company agreed to issue to the Selling Stockholder a stock purchase warrant for the purchase of 2,000,000 shares of the Company’s Class A Common Stock at an exercise price of $0.968 per share (“Warrant B”), and a stock purchase warrant for the purchase of 1,600,000 shares of the Company’s Class A Common Stock at an exercise price of $1.060 per share (“Warrant C”), (Warrant A, Warrant B and Warrant C shall collectively be referred to herein as the “Warrants”).

On April 3, 2024 the transaction contemplated by the SPA occurred (the “Closing”). The Closing was subject to a number of customary closing conditions, including, but not limited to, the Company’s entry into a Registration Rights Agreement, and providing issuance instructions to the Company’s transfer agent.

At the Closing, the Selling Stockholder purchased 499,990 shares of Class A Common Stock at a purchase price of $0.968 per share, and the Company issued prefunded warrants for $0.968 per share, Warrant A, to the Selling Stockholder to purchase 1,500,010 shares of Class A Common Stock at an exercise price of $0.00 per share.

The Company paid the Placement Agent $135,520, representing 7% of the total purchase price under the SPA of $1,936,000. Expense reimbursements under the Placement Agent Agreement total $10,000. Legal fees under the SPA total $75,000. The net proceeds from the investment was $1,715,480. The Company paid $50,000 in legal fees during the three months ended March 31, 2024 recording the expense to Deferred financing costs as of March 31, 2024.

The Company agreed to provide the Selling Stockholder a right of participation in any subsequent financings of the Company from the date of the Closing until the date that is 18 months thereafter in which the Company issues shares of its common stock (or common stock equivalents). In such an event, the Selling Stockholder will have the right to participate in that financing in up to an amount equal to 25% of the amount raised in that financing on the same terms, conditions and price provided to other Selling Stockholders in the financing.

Warrant A is exercisable at any time by the Selling Stockholder following the issue date until five (5) years thereafter. Warrant B and Warrant C may be exercised at any time by the Selling Stockholder starting six months following the issue date until five (5) years thereafter.

As of May 14, 2024, the Selling Stockholder has not requested issuance of the pre-funded Warrants, has not exercised any of the Warrants, and still holds all 499,990 shares of Class A Common Stock purchased pursuant to the SPA.

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2024 on an actual basis and as adjusted basis to reflect the sale of (i) 499,990 shares of Class A Common Stock by us at the public offering price of $0.968 per share, and (ii) pre-funded warrants to purchase 1,500,010 shares of our Class A Common Stock at $0.968 per share.

We note that the Company currently has an effective resale registration statement on Form S-3 pursuant to which the Selling Stockholder may exercise of certain of the Warrants that are exercisable for cash (which are the Warrant B and Warrant C Warrants described above). The Selling Stockholder would pay the Company an exercise price of either $0.968 per share (for the Warrant B Warrants) and $1.06 per share (for the Warrant C Warrants), subject to any adjustment pursuant to the terms of the Warrants, or an aggregate of approximately $3,632,000 if those Warrants are exercised in full for cash. However, we note that, as of the date of this Quarterly Report on Form 10-Q, the last closing price of our Class A Common Stock on the Nasdaq Capital Market was $0.75 per share on May 14, 2024. Unless (and until) this price increases over $0.968 and/or $1.06, it is unlikely any of the Warrants would be exercised for cash by the Selling Stockholder.

Going Concern

The accompanying unaudited 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 Net loss for the three months ended March 31, 2024 of $2.68 million, Net operating cash outflows of $2.16 million for the same period, and an Accumulated deficit of $53.53 million as of March 31, 2024.

The Company’s ability to continue as a going concern in the next twelve months, following the date the unaudited condensed consolidated financial statements were available to be issued, is dependent upon its ability to produce revenues and/or obtain financing sufficient to meet current and future obligations and deploy such to produce profitable operating results. Management has evaluated these conditions and plans to generate revenue and raise capital as needed to satisfy its capital needs. While the negotiation of significant additional revenue is well advanced, it has not reached a stage that allows it to be factored into a going concern evaluation. In addition, although the Company has previously been successful in raising capital as needed and has already made plans to do so as well as restructuring expenses to meet the Company’s cash needs, no assurance can be given that the Company will be successful in its capital raising efforts. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.

Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023:

Operating Activities

Net cash flows from operating activities increased by 1295.82% from $155 thousand during the three months ended March 31, 2023, compared to $2.16 million during the three months ended March 31, 2024. Of the $2.68 million net loss for the three months ended March 31, 2024, there were various cash and non-cash adjustments that were added back to the Net loss to arrive at $2.16 million cash used for operating activities for the three months ended March 31, 2024.

Those adjustments included the add back of $298 thousand related to stock-based compensation mainly due to due to bolstering our sales resources and bringing in-house technical positions that were previously outsourced. Additionally, there is an add back of $257 thousand in Deferred revenue mainly due an annual license fee billing of $345 thousand that will be recognized over the current year in alignment with the service period. Cash and noncash add backs also included $185 thousand for non-cash Depreciation and amortization, and $43 thousand for cash received on Accounts receivable.

The add backs were offset by reductions in certain cash and noncash adjustments including $162 thousand for the noncash settlement of mobile hardware liabilities, $69 thousand increase in Prepaid expenses and other current assets mainly due to the receipt of invoices for billing of 2024 service period, and $14 thousand from the timing of accruals.

Investing Activities

Net cash used in investing activities during the three months ended March 31, 2024 was $156 thousand, compared to net cash of $191 thousand used in the three months ended March 31, 2023. Cash used in investing activities during the three months ended March 31, 2024 related primarily to continued investments in technologies intended to be capitalized and monetized over time. In addition, the Company continued to prioritize intellectual property, which produced one (1) new pending patent applications and three (3) issued patents with the United States Patent and Trademark Office during the three months ended March 31, 2024.

Financing Activities

During the three months ended March 31, 2024, Net cash flows from financing activities was $22 thousand, compared to Net cash flows from financing activities of $103 thousand for the three months ended March 31, 2023. During the three months ended March 31, 2024, there was a $22 thousand tax withholding accrual for net issuances on employee equity compensation and $0 thousand for a prepayment of legal fees for the April 2024 investment discussed above in "Subsequent Investment and Pro Forma Balance Sheet".

Critical Accounting Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. There have been no material changes in the critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

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.

Evaluation of Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding our control objectives.

As of March 31, 2024, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness, design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures were effective. In addition, based on such evaluation we have identified no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Controls Over Financial Reporting

As a publicly traded company, we are required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting.

Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of our internal control over financial reporting based on the framework established in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

Based on our evaluation, management concluded that our internal control over financial reporting was effective as of March 31, 2024.

Change in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.