UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | Quarterly REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended | |
| Or | |
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from _____________ to _____________ | |
Commission File No. 001-40071
AUDDIA INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 45-4257218 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2100 Central Ave., Suite 200 Boulder, Colorado | 80301 | |
| Address of Principal Executive Offices | Zip Code |
(303) 219-9771
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market | ||||
| The Stock Market |
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Non-accelerated Filer ☒ | Smaller Reporting Company ☒ |
| Emerging Growth Company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒
As of MayAugust 12, 2022, shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
AUDDIA INC.
2022 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| i |
Unless we state otherwise or the context otherwise requires, the terms “Auddia,” “we,” “us,” “our” and the “Company” refer to Auddia Inc., a Delaware corporation.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology.
Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
| · | the ultimate impact of the ongoing coronavirus (COVID-19) pandemic, or any other health epidemic, on our business, results of operations, cash flows, financial condition and liquidity, and the global economy as a whole; | |
| · | the sufficiency of our existing cash to meet our working capital and capital expenditure needs over the next 12 months and our need to raise additional capital; | |
| · | our ability to generate revenue from new software services; | |
| · | our limited operating history; | |
| · | our ability to maintain proper and effective internal financial controls; | |
| · | our ability to continue to operate as a going concern; | |
| · | changes in laws, government regulations and policies and interpretations thereof; | |
| · | our ability to obtain and maintain protection for our intellectual property; | |
| · | the risk of errors, failures or bugs in our platform or products; | |
| · | our ability to attract and retain qualified employees and key personnel; | |
| · | our ability to manage our rapid growth and organizational change effectively; | |
| · | the possibility of security vulnerabilities, cyberattacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions; | |
| · | our compliance with data privacy laws and regulations; | |
| · | our ability to develop and maintain our brand cost-effectively; and | |
| · | the other factors set forth elsewhere in this Quarterly Report and in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021. |
These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.
| ii |
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Auddia Inc.
Condensed Balance Sheets (Unaudited)
| As of | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,361,550 | $ | 6,345,291 | ||||
| Accounts receivable, net | 56 | 87 | ||||||
| Prepaids and other current assets | 90,896 | 0 | ||||||
| Total current assets | 4,452,502 | 6,345,378 | ||||||
| Non-current assets: | ||||||||
| Property and equipment, net | 68,484 | 72,766 | ||||||
| Software development costs, net | 3,656,249 | 3,163,071 | ||||||
| Prepaids and other non-current assets | 7,158 | 52,918 | ||||||
| Total non-current assets | 3,731,891 | 3,288,755 | ||||||
| Total assets | $ | 8,184,393 | $ | 9,634,133 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 229,528 | $ | 223,196 | ||||
| Share-based compensation liability | 39,812 | 0 | ||||||
| Total current liabilities | 269,340 | 223,196 | ||||||
| Commitments and contingencies | – | – | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock - $ par value, authorized and shares issued and outstanding at March 31, 2022 and December 31, 2021 | 0 | 0 | ||||||
| Common stock - $ par value, authorized and and shares issued and outstanding at March 31, 2022 and December 31, 2021 | 12,514 | 12,416 | ||||||
| Additional paid-in capital | 74,494,186 | 74,236,910 | ||||||
| Accumulated deficit | (66,591,647 | ) | (64,838,389 | ) | ||||
| Total stockholders’ equity | 7,915,053 | 9,410,937 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,184,393 | $ | 9,634,133 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| As of | ||||||||
| June 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 2,341,289 | $ | 6,345,291 | ||||
| Accounts receivable, net | 51 | 87 | ||||||
| Prepaids and other current assets | 50,080 | 0 | ||||||
| Total current assets | 2,391,420 | 6,345,378 | ||||||
| Non-current assets: | ||||||||
| Property and equipment, net | 60,181 | 72,766 | ||||||
| Software development costs, net | 4,010,957 | 3,163,071 | ||||||
| Prepaids and other non-current assets | 7,150 | 52,918 | ||||||
| Total non-current assets | 4,078,288 | 3,288,755 | ||||||
| Total assets | $ | 6,469,708 | $ | 9,634,133 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 279,309 | $ | 223,196 | ||||
| Share-based compensation liability | 47,073 | 0 | ||||||
| Total current liabilities | 326,382 | 223,196 | ||||||
| Commitments and contingencies | – | – | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock - $ par value, authorized and shares issued and outstanding at June 30, 2022 and December 31, 2021 | 0 | 0 | ||||||
| Common stock - $ par value, authorized and and shares issued and outstanding at June 30, 2022 and December 31, 2021 | 12,514 | 12,416 | ||||||
| Additional paid-in capital | 74,772,845 | 74,236,910 | ||||||
| Accumulated deficit | (68,642,033 | ) | (64,838,389 | ) | ||||
| Total stockholders’ equity | 6,143,326 | 9,410,937 | ||||||
| Total liabilities and stockholders’ equity | $ | 6,469,708 | $ | 9,634,133 | ||||
Auddia Inc.
Condensed Statements of Operations (Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 0 | $ | 0 | ||||
| Operating expenses: | ||||||||
| Direct cost of services | 52,562 | 57,394 | ||||||
| Sales and marketing | 357,066 | 123,458 | ||||||
| Research and development | 148,763 | 46,997 | ||||||
| General and administrative | 1,017,730 | 637,708 | ||||||
| Depreciation and amortization | 176,127 | 2,183 | ||||||
| Total operating expenses | 1,752,248 | 867,740 | ||||||
| Loss from operations | (1,752,248 | ) | (867,740 | ) | ||||
| Other (expense) income: | ||||||||
| Finance charge – convertible debt | 0 | (8,141,424 | ) | |||||
| Interest expense | (1,010 | ) | (287,439 | ) | ||||
| Interest income | 0 | 105 | ||||||
| Total other expense | (1,010 | ) | (8,428,758 | ) | ||||
| Net loss before income taxes | (1,753,258 | ) | (9,296,498 | ) | ||||
| Income taxes | 0 | 0 | ||||||
| Net loss | $ | (1,753,258 | ) | $ | (9,296,498 | ) | ||
| Net loss per share attributable to common stockholders | ||||||||
| Basic and diluted | $ | (0.14 | ) | $ | (1.72 | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic and diluted | 12,464,540 | 5,408,351 | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 1 |
Auddia Inc.
Condensed Statements of Operations (Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 43,532 | 76,058 | 96,093 | 133,406 | ||||||||||||
| Sales and marketing | 740,019 | 139,611 | 1,097,086 | 263,115 | ||||||||||||
| Research and development | 151,251 | 78,285 | 300,015 | 125,282 | ||||||||||||
| General and administrative | 842,555 | 706,627 | 1,860,283 | 1,344,335 | ||||||||||||
| Depreciation and amortization | 271,005 | 2,857 | 447,132 | 5,040 | ||||||||||||
| Total operating expenses | 2,048,362 | 1,003,438 | 3,800,609 | 1,871,178 | ||||||||||||
| Loss from operations | (2,048,362 | ) | (1,003,438 | ) | (3,800,609 | ) | (1,871,178 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Finance charge – convertible debt | 0 | 0 | 0 | (8,141,424 | ) | |||||||||||
| PPP loan extinguishment | 0 | 268,662 | 0 | 268,662 | ||||||||||||
| Interest expense | (2,023 | ) | (21,836 | ) | (3,035 | ) | (309,275 | ) | ||||||||
| Interest income | 0 | 3,091 | 0 | 3,196 | ||||||||||||
| Total other income (expense) | (2,023 | ) | 249,917 | ) | (3,035 | ) | (8,178,841 | ) | ||||||||
| Net loss before income taxes | (2,050,385 | ) | (753,521 | ) | (3,803,644 | ) | (10,050,019 | ) | ||||||||
| Income taxes | 0 | 0 | 0 | 0 | ||||||||||||
| Net loss | $ | (2,050,385 | ) | $ | (753,521 | ) | $ | (3,803,644 | ) | $ | (10,050,019 | ) | ||||
| Net loss per share attributable to common stockholders Basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 2 |
Auddia Inc.
Condensed Statements of Changes in Shareholders’Stockholders’ Equity (Unaudited)
ThreeSix Months Ended March 31,June 30, 2021
| Common Stock | Additional Paid-In | Accumulated | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Total | Shares | Value | Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 485,441 | $ | 486 | $ | 38,256,584 | $ | (51,360,320 | ) | $ | (13,103,250 | ) | 485,441 | $ | 486 | $ | 38,256,854 | $ | (51,360,320 | ) | $ | (13,103,250 | ) | ||||||||||||||||||
| Issuance of common shares | 3,991,818 | 3,992 | 14,480,048 | – | 14,484,040 | 3,991,818 | 3,992 | 14,480,048 | – | 14,484,040 | ||||||||||||||||||||||||||||||
| Conversion of debt obligations | 6,814,570 | 6,814 | 15,186,619 | – | 15,193,433 | 6,814,570 | 6,814 | 15,186,619 | 15,193,433 | |||||||||||||||||||||||||||||||
| Share-based compensation | – | – | 16,131 | – | 16,131 | – | – | 31,951 | – | 31,951 | ||||||||||||||||||||||||||||||
| Net loss | – | – | – | (9,296,498 | ) | (9,296,498 | ) | – | – | – | (10,050,019 | ) | (10,050,019 | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2021 | 11,291,829 | $ | 11,292 | $ | 67,939,382 | $ | (60,656,818 | ) | $ | 7,293,856 | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 11,291,829 | $ | 11,292 | $ | 67,955,202 | $ | (61,410,339 | ) | $ | 6,556,155 | ||||||||||||||||||||||||||||||
ThreeSix Months Ended March 31,June 30, 2022
| Common Stock | Additional Paid-In | Accumulated | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Value | Capital | Deficit | Total | Shares | Value | Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 12,416,408 | $ | 12,416 | $ | 74,236,910 | $ | (64,838,389 | ) | $ | 9,410,937 | 12,416,408 | $ | 12,416 | $ | 74,236,910 | $ | (64,838,389 | ) | $ | 9,410,937 | ||||||||||||||||||||
| Exercise of restricted stock units and warrants | 98,355 | 98 | (98 | ) | – | – | 98,355 | 98 | (98 | ) | – | – | ||||||||||||||||||||||||||||
| Share-based compensation | – | – | 385,908 | – | 385,908 | – | – | 671,829 | – | 671,829 | ||||||||||||||||||||||||||||||
| Reclassification of share-based compensation award to liability | – | – | (128,534 | ) | (128,534 | ) | – | – | (135,796 | ) | (135,796 | ) | ||||||||||||||||||||||||||||
| Net loss | – | – | – | (1,753,258 | ) | (1,753,258 | ) | – | – | – | (3,803,644 | ) | (3,803,644 | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2022 | 12,514,763 | $ | 12,514 | $ | 74,494,186 | $ | (66,591,647 | ) | $ | 7,915,053 | ||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 12,514,763 | $ | 12,514 | $ | 74,772,845 | $ | (68,642,033 | ) | $ | 6,143,326 | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 3 |
Auddia Inc.
Condensed Statements of Cash Flows (Unaudited)
| Three Months Ended March 31, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (1,753,258 | ) | $ | (9,296,498 | ) | $ | (3,803,644 | ) | $ | (10,050,019 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Finance charge associated with debt to equity conversion | 0 | 8,141,424 | 0 | 8,141,424 | ||||||||||||
| Depreciation and amortization | 176,127 | 2,183 | 447,132 | 5,040 | ||||||||||||
| Share-based compensation | 385,908 | 16,131 | 671,829 | 31,951 | ||||||||||||
| Gain on PPP loan extinguishment | 0 | (268,662 | ) | |||||||||||||
| Change in assets and liabilities: | ||||||||||||||||
| Accounts receivable | 31 | 128 | 36 | 128 | ||||||||||||
| Prepaids and other non-current assets | (45,136 | ) | (128,965 | ) | (4,312 | ) | (213,800 | ) | ||||||||
| Accounts payable and accrued liabilities | 6,332 | (561,858 | ) | 56,113 | (779,697 | ) | ||||||||||
| Net cash used in operating activities | (1,229,996 | ) | (1,827,455 | ) | (2,632,846 | ) | (3,133,635 | ) | ||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Software capitalization | (661,214 | ) | (292,075 | ) | (1,278,625 | ) | (551,538 | ) | ||||||||
| Purchase of property and equipment | (3,809 | ) | (10,042 | ) | (3,808 | ) | (23,835 | ) | ||||||||
| Net cash used in investing activities | (665,023 | ) | (302,117 | ) | (1,282,433 | ) | (575,373 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Net settlement of share-based compensation awards | (88,722 | ) | 0 | (88,723 | ) | 0 | ||||||||||
| Proceeds from issuance of common shares | 0 | 14,822,459 | 0 | 14,822,459 | ||||||||||||
| Repayments of related party debt and deferred salary | 0 | (930,636 | ) | 0 | (930,636 | ) | ||||||||||
| Repayments of line of credit | 0 | (4,000,000 | ) | 0 | (4,000,000 | ) | ||||||||||
| Proceeds from issuance of PPP loan | 0 | 267,482 | 0 | 267,482 | ||||||||||||
| Proceeds from issuance of promissory notes payable | 0 | 15,000 | 0 | 15,000 | ||||||||||||
| Net cash (used in) provided by financing activities | (88,722 | ) | 10,174,305 | (88,723 | ) | 10,174,305 | ||||||||||
| Net (decrease) increase in cash and restricted cash | (1,983,741 | ) | 8,044,733 | (4,004,002 | ) | 6,465,297 | ||||||||||
| Cash, beginning of period | 6,345,291 | 117,914 | 6,345,291 | 117,914 | ||||||||||||
| Cash, end of period | $ | 4,361,550 | $ | 8,162,647 | $ | 2,341,289 | $ | 6,583,211 | ||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||||
| Cash paid for interest | $ | 1,010 | $ | 138,792 | $ | 3,035 | $ | 160,628 | ||||||||
| Cash paid for income taxes | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
| Supplemental disclosures of non-cash activity: | ||||||||||||||||
| Shares issued for conversion of indebtedness | 0 | 6,814,570 | 0 | 15,193,433 | ||||||||||||
| PPP loan extinguishment | $ | 0 | $ | (268,662 | ) | |||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 4 |
Auddia Inc.
Notes to Condensed Financial Statements (Unaudited)
Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Auddia Inc., formerly Clip Interactive, LLC, (the “Company”, “Auddia”, “we”, “our”) is a technology company that is reinventing how consumers engage with audio through the development of a proprietary AI platform for audio and innovative technologies for podcasts. Clip Interactive, LLC was initially formed as a Colorado limited liability company on January 14, 2012 and on November 25, 2019 changed its trade name to Auddia.
On February 16, 2021, the Company completed an initial public offering (the “IPO”) of 3,991,818 units, at $4.125 per unit, consisting of one share of common stock and one Series A warrant to purchase one share of common stock at an exercise price of $4.54 per share. In addition, the underwriters exercised their option to purchase 598,772 Series A warrants to cover over-allotments and were issued 319,346 in representative warrants at an exercise price of $5.15625 per share. After deducting underwriters commissions and expenses, the Company received net proceeds of approximately $15.1 million and its common stock commenced trading on Nasdaq under the ticker symbol “AUUD”. Concurrently with the IPO, holders of the Company’s promissory notes, convertible notes, and related party notes, along with accrued interest, were converted into 6,814,570 shares of the Company’s common stock.
Concurrently with the IPO the Company converted from a Colorado limited liability company to a Delaware corporation. This accounting change has been given retrospective treatment in the condensed financial statements.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
Unaudited interim financial information
The condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K. The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates
The preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The condensed financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to valuation of capital stock, warrants and options to purchase shares of the Company's common stock, and the estimated recoverability and amortization period for capitalized software development costs. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.
| 5 |
Risks and Uncertainties
The Company is subject to various risks and uncertainties frequently encountered by companies in the early stages of development. Such risks and uncertainties include, but are not limited to, its limited operating history, competition from other companies, limited access to additional funds, dependence on key personnel, and management of potential rapid growth. To address these risks, the Company must, among other things, develop its customer base; implement and successfully execute its business and marketing strategy; develop follow-on products; provide superior customer service; and attract, retain, and motivate qualified personnel. There can be no guarantee that the Company will be successful in addressing these or other such risks.
Cash
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had 0 cash equivalents at March 31,June 30, 2022 or December 31, 2021.
The Company maintains cash deposits at several financial institutions, which are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At March 31,June 30, 2022 and December 31, 2021, the Company had $3,861,5502,022,091 and $5,845,2915,910,758, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.
Software Development Costs
The Company accounts for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose is probable.
The Company ceases capitalization of development costs once the software has been substantially completed and is available for its intended use. Software development costs are amortized over a useful life estimated by the Company’s management of five years. Costs associated with significant upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies.
Unamortized capitalized software development costs determined to be in excess of anticipated future net revenues are considered impaired and expensed during the period of such determination. Software development costs of $661,213617,411 and $292,075259,463 were capitalized for the three months ended March 31,June 30, 2022 and 2021, respectively and $1,278,625 and $551,538 were capitalized for the six months ended June 30, 2022 and 2021, respectively. Amortization of capitalized software development costs were $168,036262,703 and $0 for the three months ended March 31,June 30, 2022 and 2021, respectively and $430,739 and $0 for the six months ended June 30, 2022 and 2021, respectively and are included in depreciation and amortization expense.
Revenue Recognition
Revenue will be measured according to Accounting Standards Codification (“ASC”) 606, Revenue – Revenue from Contracts with Customers, and iswill be recognized based on consideration specified in a contract with a customer and excludeswill exclude any sales incentives and amounts collected on behalf of third parties. We will recognize revenue when we satisfy a performance obligation by transferring control over a service or product to a customer. We will report revenues net of any tax assessed by a governmental authority that is both imposed on, and concurrent with, a specific revenue-producing transaction between a seller and a customer in our condensed statements of operations. Collected taxes will be recorded within Other current liabilities until remitted to the relevant taxing authority.
Subscriber revenue will consist primarily of subscription fees and other ancillary subscription-based revenues. Revenue will be recognized on a straight-line basis when the performance obligations to provide each service for the period are satisfied, which is over time as our subscription services are continuously available and can be consumed by customers at any time. There is no revenue recognized for unpaid trial subscriptions.
| 6 |
Customers may pay for the services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue will be recognized as revenue in our statement of operations as the services are provided.
The Company accounts for share-based compensation arrangements with employees, directors, and consultants and recognizes the compensation expense for share-based awards based on the estimated fair value of the awards on the date of grant in accordance with ASC 718.
Compensation expense for all share-based awards is based on the estimated grant-date fair value and recognized in earnings over the requisite service period (generally the vesting period). The Company records share-based compensation expense related to non-employees over the related service periods.
Certain stock awards include a net-share settlement feature that provides the grantee an option to withhold shares to satisfy tax withholding requirements and are classified as a share-based compensation liability. Cash paid to satisfy tax withholdings is classified as financing activities in the condensed statements of cash flows.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies.
Note 2 – Property & Equipment and Software Development Costs
Property and equipment and software development costs consisted of the following as of:
| Schedule of property, equipment and software development costs | ||||||||||||||||
| March 31, 2022 | December 31, 2021 | June 30 2022 | December 31, 2021 | |||||||||||||
| Computers and equipment | $ | 771,127 | $ | 767,318 | $ | 771,127 | $ | 767,318 | ||||||||
| Furniture | 7,262 | 7,262 | 7,262 | 7,262 | ||||||||||||
| Software | 5,228 | 5,228 | 5,228 | 5,228 | ||||||||||||
| Accumulated depreciation | (715,133 | ) | (707,042 | ) | (723,436 | ) | (707,042 | ) | ||||||||
| Total property and equipment, net | $ | 68,484 | $ | 72,766 | $ | 60,181 | $ | 72,766 | ||||||||
| Software development costs | 5,359,965 | $ | 4,698,752 | 5,977,375 | $ | 4,698,752 | ||||||||||
| Accumulated amortization | (1,703,716 | ) | (1,535,680 | ) | (1,966,418 | ) | (1,535,680 | ) | ||||||||
| Total software development costs, net | $ | 3,656,249 | $ | 3,163,071 | $ | 4,010,957 | $ | 3,163,071 | ||||||||
The Company recognized depreciation expense of $8,09116,393 and $2,1835,040 for the threesix months ended March 31,June 30, 2022 and 2021, respectively related to property and equipment and amortization expense of $168,036430,739 and $0 for the threesix months ended March 31,June 30, 2022 and 2021, respectively related to software development costs.
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Note 3 – Balance Sheet Disclosures
Accounts payable and accrued liabilities consist of the following:
| Schedule of accounts payable and accrued liabilities | ||||||||||||||||
| March 31, 2022 | December 31, 2021 | June 30, 2022 | December 31, 2021 | |||||||||||||
| Accounts payable and accrued expenses | $ | 227,971 | $ | 210,929 | $ | 277,409 | $ | 210,929 | ||||||||
| Credit cards payable | 1,557 | 12,267 | 1,900 | 12,267 | ||||||||||||
| Accounts payable and accrued liabilities | $ | 229,528 | $ | 223,196 | $ | 279,309 | $ | 223,196 | ||||||||
Note 4 – Line of Credit
On April 10, 2018 theThe Company refinanced its previoushad a line of credit with a different bank and this agreement was amended in July 2019 and March 2021. The principal balancewhich was repaid in full on July 8, 2021. Interest accrued at a variable rate based on the bank’s prime rate plus 1% (4.25% at December 31, 2020) but at no time less than 4.0%. Monthly interest payments were required, with any outstanding principal due on July 10, 2021. Interest expense for the threesix months ended March 31,June 30, 2022 and 2021 was $0 and $47,29669,132, respectively.
The line of credit was collateralized by all assets of the Company, including $2,000,000 of cash held in a control account at the lender. The Company also maintained a minimum balance at the lender to cover two months of interest payments. Prior to our IPO, the line of credit was collateralized by $6,000,000 of cash assets of two shareholders held in control accounts at the lender.
Following the Company’s IPO in February 2021 the line of credit was amended and the Company paid down the outstanding principal balance on its bank line of credit from $6,000,000 to $2,000,000 and the available principal balance for the line of credit was reduced from $6,000,000 to $2,000,000. Further, the $6,000,000 of cash collateral previously provided by the two shareholders was released. The remaining principal balance of $2,000,000 was repaid in full and the line of credit was terminated on July 8, 2021.
The outstanding balance on the line of credit at December 31, 2020 was $6,000,000. The shareholder who previously provided the $2,000,000 control account had a collateral agreement with the Company which is described in Note 6. This agreement was terminated in March 2021.
Note 5 – Convertible Notes Payable, Notes Payable to Related Parties and Promissory Notes
Convertible notes payable
During the year ended December 31, 2020 investors purchased an additional $404,601 of ourThe Company had convertible notes such thatoutstanding at December 31, 2020 in the balanceamount of the convertible notes, including accrued interest, was $2,295,305., inclusive of accrued interest. These convertible notes accrued interest at 6.0% per year and were scheduled to mature on December 31, 2021. In conjunction with the February 2021 IPO, the Notes automatically converted into shares of common stock at discounts ranging from 50% to 75% of the IPO price. Interest expense for the threesix months ended March 31,June 30, 2022 and 2021 was $0 and $16,586, respectively.
Accrued fees to a related party
The Company had an agreement with a shareholder to provide collateral for a bank line of credit described in Note 4 – Line of Credit. The amount of the cash collateral provided by the shareholder to the bank was $2,000,000. The collateral agreement required a commitment to pay collateral fees of $710,000 (comprised of annual interest of $660,000 plus the $50,000 renewal fee) to the shareholder and issue 3,454 common stock warrants. In January 2019, in connection with the collateral agreement, the Company converted accrued fees of $725,000 into an unsecured note payable, which bore interest at 33% annually and had a maturity date of December 31, 2021. The fees that accrued on the collateral arrangement were 33% percent of the collateral amount annually plus an annual renewal fee of $50,000. Interest expense for the threesix months ended March 31,June 30, 2022 and 2021 was $0 and $208,727, respectively. The balance outstanding on the accrued collateral fees was $1,960,336 at December 31, 2020, excluding the $725,000 unsecured note payable. This collateral agreement terminated in March 2021.
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In conjunction with the February 2021 IPO, the notes payable and accrued interest due to this shareholder were converted to shares of common stock.
Promissory notes payable
During the twelve months ended December 31, 2020, theThe Company issued, to a number of existing shareholders, in four separate tranches, $ of Promissory Noteshad promissory notes payable outstanding that accrue interest at a rate of % per year and were scheduled to mature on and accrue interest at %. When issued, the notes incorporated the following attributes: interest on the Notes accrue at 6% and upon the successful completion of a qualified IPO by December 31, 2021, theThe notes and accrued interest would convert into equity, upon a qualified IPO at a per share valuation equal to $40.0 million. In addition, each investor in the Promissory Notes would receive shares and warrants based on a formula that takes into account the number of shares and warrants the investor owned before the investment in these Promissory Notes, as well as a portion of the bonus allocation of 1,038,342 shares made available to the investors. Interest expense for the threesix months ended March 31,June 30, 2022 and 2021 was $ and $, respectively.
In conjunction with the February 2021 IPO, all of the Promissory Notes collectively converted into shares of common stock.
The Company recognized a finance charge to interest expense of $ related to the conversion of the convertible notes, notes payable to related parties and promissory notes during the three months ended March 31,in February 2021.
Note 6 – Notes Payable
Notes payable to related parties and deferred salary
An executive officer of the Company agreed to defer receipt of compensation to preserve liquidity in the Company. The accumulated amount of compensation owed to this executive officer was approximately $631,000 at December 31, 2020.. The Company paid this deferred compensation in the first quarter of 2021.
During 2019, theThe Company issuedhad convertible notes payable (the “Notes”) to three related parties for $80,000,in the amounts of $200,000 and $50,000, respectively. The Notes did not accrue interest or havewithout a stated interest rate or stated maturity date. The outstanding note payable for $80,000 was repaid in January 2020. In December 2019, the two other note holders elected to convert their notes into convertible Notes due December 31, 2021. Two other existing investors who were owedentered into a total of $17,197 forconvertible note related to services byprovided to the Company also agreed to convert their payables into convertible Notes. During 2019in the amount of $17,197. The Company also issued a convertible note payable to a related party for consulting services incurred by the Company in the amount of $486,198. As of December 31, 2020, the outstanding balance for consulting services was $440,904. The Company paid these Notes in the first quarter of 2021.
In February 2020, theThe Company obtainedhad a $500,000 short term loan of $500,000 short term loan from a related party. The Company was advanced $485,000, net of $15,000 in closing fees, and immediately placed $140,741 into an escrow account, owned and controlled by the shareholder to provide funds for the scheduled repayments. Repayment of the principal and loan financing fee occurs through weekly payments of $17,593 until the loan and financing fee is paid in full. The loan financing fee increased with the length of the payback period and was maximized at $165,000 after month five. The outstanding balance was repaid in February 2021.
Cares Act Paycheck Protection Program loan
In April 2020, theThe Company entered into a promissory note evidencing an unsecured loan (the “First Loan”) in the amount of $268,662 made to the Company under the Paycheck Protection Program (the “PPP”). In January 2021, the Company entered into a second promissory note (the “Second Loan” or combined with the first loan, the “PPP Loans”) of $267,482 under the PPP. The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration.
The First Loan was set to mature in April 2022 and the Second Loan was set to mature in January 2023. The PPP Loans bore interest at a rate of 1% per annum. Beginning November 2020, the Company was required to make 18 monthly payments of principal and interest in the amount of $14,370 related to the First Loan. The PPP Loans may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from the Loans may only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations.
The PPP Loans contained customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the Loan documents. The occurrence of an event of default will result in an increase in the interest rate to 18% per annum and provides the lender with customary remedies, including the right to require immediate payment of all amounts owed under the PPP Loans.
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Pursuant to the terms of the CARES Act and the PPP, the Company applied for forgiveness for both the PPP Loans. On June 15, 2021, the Company received confirmation that the First Loan was approved for forgiveness and the Company recorded $268,662 in PPP loan extinguishment to other income during the year ended December 31, 2021. On November 2, 2021, the Company received confirmation that the Second Loan was approved for forgiveness and the Company recorded $267,482 in PPP loan extinguishment to other income during the year ended December 31, 2021. The amount eligible for forgiveness was based on the amount of Loan proceeds used by the Company (during the eight-week period after the lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP.
Note 7 – Commitments and Contingencies
Operating Lease
In April 2021, the Company entered into a lease agreement for a new primary office space in Boulder, Colorado comprising of 8,639 square feet. The lease commenced on May 15, 2021 and terminates after 12 months. The lease has an initial base rent of $7,150 per month, with the first 15 days rent free and includes three separate six month renewal options, subject to fixed rate escalation increases. The Company exercised it’s first six month renewal option to extend the lease through November 2022. The Company previously leased approximately 3,000 square feet of office space that expired on April 30, 2021. Rent expense was $21,449 and $18,053 for the three months ended March 31, 2022 and 2021, respectively.as follows:
| Schedule of rent expenses | ||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Rent expense | $ | 21,733 | 13,437 | $ | 43,182 | 31,490 | ||||||||||
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.
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Stock Options
The following table presents the activity for stock options outstanding:
| Schedule of stock option activity | ||||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Non-Qualified | Average | Non-Qualified | Average | |||||||||||||
| Options | Exercise Price | Options | Exercise Price | |||||||||||||
| Outstanding - December 31, 2021 | 1,504,791 | $ | 2.96 | 1,504,791 | $ | 2.96 | ||||||||||
| Granted | 293,750 | 1.79 | 293,750 | 1.79 | ||||||||||||
| Forfeited/canceled | 0 | 0 | 0 | 0 | ||||||||||||
| Exercised | 0 | 0 | 0 | 0 | ||||||||||||
| Outstanding - March 31, 2022 | 1,798,541 | $ | 2.77 | |||||||||||||
| Outstanding – June 30, 2022 | 1,798,541 | $ | 2.77 | |||||||||||||
The following table presents the composition of options outstanding and exercisable:
| Options outstanding and exercisable | |||||||||||||||||||||||||||||||||||||||||
| Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||||||||||
| Exercise Prices | Number | Price* | Life* | Number | Price* | Number | Price* | Life* | Number | Price* | |||||||||||||||||||||||||||||||
| $2.70 | 68,518 | $ | 2.70 | 68,518 | $ | 2.70 | 68,518 | $ | 2.70 | 68,518 | $ | 2.70 | |||||||||||||||||||||||||||||
| $2.90 | 53,128 | $ | 2.90 | 53,128 | $ | 2.90 | 53,128 | $ | 2.90 | 53,128 | $ | 2.90 | |||||||||||||||||||||||||||||
| $4.26 | 171,263 | $ | 4.26 | 147,822 | $ | 4.26 | 171,263 | $ | 4.26 | 152,217 | $ | 4.26 | |||||||||||||||||||||||||||||
| $2.79 | 1,211,882 | $ | 2.79 | 493,439 | $ | 2.79 | 1,211,882 | $ | 2.79 | 545,939 | $ | 2.79 | |||||||||||||||||||||||||||||
| $1.79 | 293,750 | $ | 1.79 | 7,500 | $ | 1.79 | 293,750 | $ | 1.79 | 7,500 | $ | 1.79 | |||||||||||||||||||||||||||||
| Total - March 31, 2022 | 1,798,541 | $ | 3.65 | 770,407 | $ | 3.06 | |||||||||||||||||||||||||||||||||||
| Total – June 30, 2022 | 1,798,541 | $ | 2.77 | 827,302 | $ | 3.05 | |||||||||||||||||||||||||||||||||||
________________________
*
| * | Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively. |
During the threesix months ended March 31,June 30, 2022, the Company granted 293,750 stock options to certain executives and key employees. Under the terms of the option agreements, the options are subject to certain vesting requirements. The fair value of each award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation.
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Restricted Stock Units
The following table presents the activity for restricted stock units outstanding:
| Schedule of warrant activity | ||||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Restricted | Average | Restricted | Average | |||||||||||||
| Stock Units | Exercise Price | Stock Units | Exercise Price | |||||||||||||
| Outstanding - December 31, 2021 | 424,500 | $ | 0 | 424,500 | $ | 0 | ||||||||||
| Granted | 150,000 | 0 | 150,000 | 0 | ||||||||||||
| Forfeited/canceled | 0 | $ | 0 | 0 | $ | 0 | ||||||||||
| Vested/issued | (143,625 | ) | 0 | (143,625 | ) | 0 | ||||||||||
| Outstanding – March 31, 2022 | 430,875 | $ | 0 | |||||||||||||
| Outstanding – June 30, 2022 | 430,875 | $ | 0 | |||||||||||||
During the threesix months ended March 31,June 30, 2022, the Company granted 150,000 restricted stock units. Under terms of the restricted stock agreements, the restricted stock units are subject to a certainfour year vesting schedule.
During the threesix months ended March 31,June 30, 2022, certain restricted stock unit holders elected a net-share settlement for vested shares to satisfy income tax requirements. The Company applied modification accounting in accordance with ASC 718, and reclassified these share-based awards from equity classification to liability classification. The Company recognized a share-based compensation liability as of March 31,June 30, 2022 of $ related to the fair value of vested shares over the service period.
The Company recognized share-based compensation expense related to stock options and restricted stock units in the amounts of $ and $ for the threesix months ended March 31,June 30, 2022 and 2021, respectively. The remaining unvested share-based compensation expense of $ is expected to be recognized over the next 4745 months.
Warrants
The following table presents the activity for warrants outstanding:
| Schedule of warrant activity | |||||||
| Weighted | |||||||
| Warrants | Average | ||||||
| Outstanding | Exercise Price | ||||||
| Outstanding - December 31, 2021 | 4,172,247 | $ | 4.80 | ||||
| Granted | 0 | 0 | |||||
| Forfeited/cancelled/restored | 0 | 0 | |||||
| Exercised | (148 | ) | 0.87 | ||||
| Outstanding - March 31, 2022 | 4,172,099 | $ | 4.80 | ||||
| Schedule of warrant activity | ||||||||
| Weighted | ||||||||
| Warrants | Average | |||||||
| Outstanding | Exercise Price | |||||||
| Outstanding - December 31, 2021 | 4,172,247 | $ | 4.80 | |||||
| Granted | 0 | 0 | ||||||
| Forfeited/cancelled/restored | 0 | 0 | ||||||
| Exercised | (148 | ) | 0.87 | |||||
| Outstanding – June 30, 2022 | 4,172,099 | $ | 4.80 | |||||
In connection with the February 2021 IPO, the Company issued warrants to purchase shares of common stock and issued to warrants to its underwriters to cover over-allotments. The Company also issued of representative warrants to its underwriters to purchase shares of common stock and these representative warrants contain a cashless exercise feature.
During the threesix months ended March 31,June 30, 2022 certain holders of our Pre-IPO warrants exercised 148 warrants for shares of common stock at the net exercise price of $0.87 per share.
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All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately years as of March 31,June 30, 2022.
Basic net loss per share is computed by dividing net loss, which is allocated based upon the proportionate amount of weighted average shares outstanding, to each class of stockholder’s stock outstanding during the period. For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans.
As of March 31,June 30, 2022 and 2021, shares and shares, respectively of potentially dilutive weighted average shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented.
Note 10 – Subsequent Events
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 855, Subsequent Events, management has performed an evaluation of subsequent events through the date that the financial statements were available to be issued on August 12, 2022 and has determined that it does not have any material subsequent events to disclose in these financial statements.
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`Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 17, 2022. This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. You should carefully read the “Risk Factors” section of this Quarterly Report and of our Annual Report on Form 10-K for the year ended December 31, 2021 to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
We are a technology company that is reinventing how consumers engage with audio through the development of a proprietary AI platform for audio and innovative technologies for podcasts. We are leveraging these technologies to bring to market two industry first Apps, Faidr and Vodacast.
The Faidr app gives consumers the opportunity to listen to any AM/FM radio station with no commercials while personalizing the listening experience through skips, the insertion of on-demand content and the programming of audio routines to customize listening sessions such as a daily commute. The Faidr App represents the first-time consumers can access the local content uniquely provided by radio in the commercial free and personalized manner many consumers have come to demand for media consumption.
We are leveraging our legacy businesslook to bring to market a premium AM/FM radio listening experience through Faidr. The Faidr App is intended to be downloaded by consumers who will pay a subscription fee to listen to any streaming AM/FM radio station without commercials. Advanced features will allow consumers to skip any content heard on the station, request audio content on-demand, and program an audio routine. We believe Faidr represents a significant differentiated audio streaming product that will be the first to come to market since the emergence of popular streaming music apps such as Pandora, Spotify, Apple Music, Amazon Music, etc. We believe that the most significant point of differentiation is that in addition to music, the AppFaidr is intended to deliver non-music content that includes local sports, news, weather, traffic and the discovery of new music. Radio is the dominant audio platform for local content and new music discovery.
We recently launched the Faidr App to include all major U.S. radio stations on February 15, 2022.2022 and launched marketing campaigns for Faidr to build an audience and demonstrate consumer interest. We are currently providing consumers a 90-day free trial of the App and expect to start converting users to paying subscribers during thestarted trialing subscriptions with a subset of consumers in late second quarter. WeIn addition, we are also continuing to enhance the listening experience for consumers by: 1) advancing the training of our proprietary AI technology primarily around talk stations and talk segments on music stations; 2) continual improvements to the user interface and consumer interaction within the App; and 3) exploring additional content choices, thatincluding podcasting, some of which will become available in the App during the year. We expect to continue to understand consumer interest for subscription during the third quarter.
The Faidr mobile App is available today through the iOS and Android App stores.
We also have developed a podcasting platform called Vodacast. Vodacast provides a unique suite of tools that helps Podcasters create additional digital content for their podcast episodes as well as plan their episodes, build their brand around their Podcast and monetize their content with new monetization channels. One innovative and proprietary part of the Vodacast platform is the availability of tools to create and distribute an interactive digital feed which supplements podcast episode audio with additional digital.digital content. These content feeds allow podcasters to tell deeper stories to their listeners while giving podcasters access to digital revenue for the first time. Podcasters will be able to build these interactive feeds using The Vodacast Hub, a content management system that also serves as a tool to plan and manage podcast episodes. The digital feed activates a new digital ad channel that turns every audio ad into a direct-response digital ad, increasing the effectiveness and value of their established audio ad model. The feed also presents a richer listening experience, as any element of a podcast episode can be supplemented with images, videos, text and web links. This feed appears fully synchronized in the Vodacast mobile App, and it also can be hosted and accessed independently (e.g., through any browser), making the content feed universally distributable.
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Vodacast will also introduce a unique and industry first multi-channel, highly flexible set of revenue channels that podcasters can activate in combination to allow listeners to choose how they want to consume and pay for content. “Flex Revenue” allows podcasters to continue to run their standard audio ad model and complement those ads with direct response enabled digital ads in each episode content feed, increasing the value of advertising on any podcast. “Flex Revenue” will also activate subscriptions, on-demand fees for content (e.g., listen without audio ads for a micro payment fee) and direct donations from listeners. Using these channels in combination, podcasters can maximize revenue generation and exercise higher margin monetization models, beyond basic audio advertising.
The Vodacast mobile App is available today through the iOS and Android App stores.
We recently launched marketing campaigns for Vodacast during the second quarter to continue to grow our user base and encourage listeners to download the Vodacast App and listen to all their favorite shows. WeBecause podcasting is the type of audio content that music app users expect to find in their preferred apps and platforms (e.g. TuneIn, iHeart, Audacy, Spotify), we are continuingcurrently exploring the migration of podcasting and the full suite of tools and features from Vodacast into our Faidr App to provide an all-inclusive and immersive listening experience through digital feeds and additional content. We are also continuing to recruit podcast hostsexperience. During this time, we have paused direct marketing promotion related to the PlatformVodacast App while we continue to develop and enhance monetization channels within the App.explore podcasting into Faidr.
We have funded our operations with proceeds from the February 2021 IPO and Series A warrants exercise in July 2021. Since inception we have incurred significant operating losses. As of March 31,June 30, 2022, we had an accumulated deficit of $66.6$68.6 million. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and commercialization of one or more of our Apps.
As a part of our capital strategy, we recently implemented certain cost saving initiatives that reduced our quarterly cash spend. This includes certain cost saving initiatives related to our research and development and sales and marketing costs and includes a reduction of headcount and direct promotion of our Apps while we continue to enhance our listening experience. We expect that our expenses and capital requirements will increase substantiallyagain sometime in connection with our ongoing activities,the future, particularly if and as we:
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| · | continue market studies of our products; and | |
| · | add operational and general administrative personnel which will support our product development programs, commercialization efforts and our transition to operating as a public company. |
As a result, we maywill need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales,subscriptions, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.candidates in addition to the cost saving initiatives we have already made effective.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
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As of March 31,June 30, 2022, we had cash of approximately $4.4$2.3 million, which we believe should fund our operating expenses and capital expenditure requirements through at least December 31, 2022. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and capital resources.” To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our Apps or other research and development initiatives.
Components of our results of operations
Operating expenses
Direct costs of services
Direct cost of services consists primarily of costs incurred related to our technology and development of our Apps, including hosting and other technology related expenses. Historically, we had higher direct costs of services related to our legacy platform, however, since the termination of our legacy services and platform in August 2020, these costs have been reduced. We expect our direct costs of services to increase in the future as we continue to develop and enhance our technology related to the Faidr and Vodacast Apps.
Sales and marketing
Our sales and marketing expenses consist primarily of salaries, direct to consumer promotional spend and consulting services, all of which are related to the sales and promotion performed during the year related to our products.period. We expect our sales and marketing expenses to increase substantiallyfluctuate period by period as we continue to promote the national commercial launch of our Faidr product and look to generate revenue for our products through customer acquisition, retention and retention.subscription conversion.
Research and development
Since our inception, we have focused significant resources on our research and development activities related to the software development of our technology. We account for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose is probable. We cease capitalization of development costs once the software has been substantially completed and is available for its intended use. Software development costs are amortized over a useful life estimated by the Company’s management of three years. Costs associated with significant upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies. Unamortized capitalized software development costs determined to be in excess of anticipated future net revenues are impaired and expensed during the period of such determination.
We recently implemented certain cost saving initiatives which includes the reduction of a part of our research and development staff. We still expect to continue to incur substantial research and development expenses and capitalization in the future, even after the reduction of headcount as we continue to develop and enhance our Faidr and Vodacast Apps.
General and administrative
Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and professional fees related to auditing, tax, general legal services, and consulting services. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for commercialization of our products and support our operations as a public company, including increased expenses related to legal, accounting, insurance, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, directors and officers liability insurance premiums and investor relations activities.
| 16 |
Other income and expense
Our other income and expense consist of interest income related to our cash at financial institutions, debt extinguishment related to our PPP loans, interest expense from our line of credit, and a finance charge related to conversion of outstanding debt into shares of common stock related to the February 2021 IPO. We expect our other expense to decrease as we paid off our outstanding balance on our line of credit and will not incur any additional debt conversion charges.
Results of operations
Comparison of the three months ended March 31,June 30, 2022 and 2021
The following table summarizes our results of operations:
| Three Months Ended March 31, | Three Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | Increase/ (Decrease) | 2022 | 2021 | Increase/(Decrease) | |||||||||||||||||||
| Revenue | $ | – | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Direct costs of service | 52,562 | 57,394 | (4,832 | ) | 43,532 | 76,058 | (32,526 | ) | ||||||||||||||||
| Sales and marketing | 357,066 | 123,458 | 233,608 | 740,019 | 139,611 | 600,408 | ||||||||||||||||||
| Research and development | 148,763 | 46,997 | 101,766 | 151,251 | 78,285 | 72,966 | ||||||||||||||||||
| General and administrative | 1,017,730 | 637,708 | 380,022 | 842,555 | 706,627 | 135,928 | ||||||||||||||||||
| Depreciation and amortization | 176,127 | 2,183 | 173,944 | 271,005 | 2,857 | 268,148 | ||||||||||||||||||
| Total operating expense | 1,752,248 | 867,740 | 884,508 | 2,048,362 | 1,003,438 | 1,044,924 | ||||||||||||||||||
| Loss from operations | (1,752,248 | ) | (867,740 | ) | (884,508 | ) | (2,048,362 | ) | (1,003,438 | ) | (1,044,924 | ) | ||||||||||||
| Other income (expense), net: | (1,010 | ) | (8,428,758 | ) | 8,427,748 | (2,023 | ) | 249,917 | (251,940 | ) | ||||||||||||||
| Net loss | $ | (1,753,258 | ) | $ | (9,296,498 | ) | $ | 7,543,240 | $ | (2,050,385 | ) | $ | (753,521 | ) | $ | (1,296,864 | ) | |||||||
| 17 |
Revenue
Total revenues were $0 for the three months ended March 31,June 30, 2022 and March 31,June 30, 2021. We are continuing to develop the new Faidr and Vodacast products to establish new revenue streams and expect to start generating our first revenue during the third quarter of 2022.
Direct cost of services
Direct Cost of Services decreased $4,832$32,526 or 8.4%42.8%, from $57,394$76,058 for the three months ended March 31,June 30, 2021 compared to $52,562$43,532 for the three months ended March 31,June 30, 2022. We continue to incur direct cost of services expense related to hosting and other music services related to our Faidr App and expect these costs to increase in the future.
Sales and marketing
Sales and marketing expenses increased by $233,608$600,408 or 189.2%430.1%, from $123,458$139,611 for the three months ended March 31,June 30, 2021 to $357,066$740,019 for the three months ended March 31,June 30, 2022 as we established and hireddue to our internal marketing team during Q4 of 2021 and we significantly increased our promotion expenses during the first quarter of 2022increase in promotional activity related to the national launch of our Faidr App, and continued promotion and user acquisition for our Vodacast App. The increase in marketing promotion was primarily understanding consumer interest and demand for our Faidr App. As a part of that increased marketing spend, we were able to identify key metrics and user data which exceeded our initial targets for consumer downloads and monthly active users (MAUs).
Research and development
Research and development expenses increased by $101,766$72,966 or 216.5%93.2%, from $46,997$78,285 for the three months ended March 31,June 30, 2021 to $148,763$151,251 for the three months ended March 31,June 30, 2022 primarily related to additional staffing on our development team as we continued to advance the Faidr and Vodacast Apps. Our research and development staffing and related development costs were $766,779 and capitalized software expenses of $617,411 for the three months ended June 30, 2022 as compared to staffing and related development costs of $354,188 and capitalized software expenses of $259,463 for the three months ended June 30, 2021. The majority of development time was spent on our Faidr and Vodacast Apps. We started amortizing capitalized development costs associated with Faidr during Q1 2022 and continue to amortize development expense related to Vodacast.
General and administrative
General and administrative expenses increased by $135,928 or 19.2%, from $706,627 for the three months ended June 30, 2021 compared to $842,555 for the three months ended June 30, 2022. The increase resulted primarily from increased stock compensation expense related to employee stock options granted in Q3 2021 and Q1 2022 partially offset by lower professional fees related to our IPO and recruiting fees incurred during 2021. Stock compensation expense was $285,920 and $15,820 for the three months ended June 30, 2022 and 2021, respectively.
Depreciation and amortization
Depreciation and amortization expenses increased by $268,148, from $2,857 for the three months ended June 30, 2021 compared to $271,005 for the three months ended June 30, 2022. The increase is related to amortization of our Faidr and Vodacast Apps, which started amortization during Q1 2022 and Q4 2021, respectively.
Other income (expense), net
Total other income (expense) decreased by $251,940, from $249,917 for the three months ended June 30, 2021 to ($2,023) for the three months ended June 30, 2022. The decrease was mostly related to a net gain from the extinguishment of our first PPP loan during 2021.
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Comparison of the six months ended June 30, 2022 and 2021
The following table summarizes our results of operations:
| Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Increase/(Decrease) | ||||||||||
| Revenue | $ | – | $ | – | $ | – | ||||||
| Operating expenses: | ||||||||||||
| Direct costs of service | 96,093 | 133,406 | (37,313 | ) | ||||||||
| Sales and marketing | 1,097,086 | 263,115 | 833,971 | |||||||||
| Research and development | 300,015 | 125,282 | 174,733 | |||||||||
| General and administrative | 1,860,283 | 1,344,335 | 515,948 | |||||||||
| Depreciation and amortization | 447,132 | 5,040 | 442,092 | |||||||||
| Total operating expense | 3,800,609 | 1,871,178 | 1,929,431 | |||||||||
| Loss from operations | (3,800,609 | ) | (1,871,178 | ) | (1,929,431 | ) | ||||||
| Other income (expense), net: | (3,035 | ) | (8,178,841 | ) | 8,175,806 | |||||||
| Net loss | $ | (3,803,644 | ) | $ | (10,050,019 | ) | $ | 6,246,375 | ||||
Revenue
Total revenues were $0 for the three months ended June 30, 2022 and June 30, 2021. We are continuing to develop the new Faidr and Vodacast products to establish new revenue streams and expect to start generating our first revenue during the third quarter of 2022.
Direct cost of services
Direct Cost of Services decreased $37,313 or 28.0%, from $133,406 for the six months ended June 30, 2021 compared to $96,093 for the six months ended June 30, 2022. We continue to incur direct cost of services expense related to hosting and other music services related to our Faidr App and expect these costs to increase in the future.
Sales and marketing
Sales and marketing expenses increased by $833,971 or 317.0%, from $263,115 for the six months ended June 30, 2021 to $1,097,086 for the six months ended June 30, 2022 due to our increase in promotional activity related to the national launch of our Faidr App, and continued promotion for our Vodacast App. The increase in marketing promotion was primarily understanding consumer interest and demand for our Faidr App. As a part of that increased marketing spend, we were able to identify key metrics and user data which exceeded our initial targets for consumer downloads and monthly active users (MAUs).
Research and development
Research and development expenses increased by $174,733 or 139.5%, from $125,282 for the six months ended June 30, 2021 to $300,015 for the six months ended June 30, 2022 primarily related to additional staffing on our development team as we continue to advance the Faidr and Vodacast Apps. Our research and development staffing and related development costs were $809,976$1,578,637 and capitalized software expenses of $661,213$1,278,625 for the threesix months ended March 31,June 30, 2022 as compared to staffing and related development costs of $339,072$692,976 and capitalized software expenses of $292,075$551,538 for the threesix months ended March 31,June 30, 2021. MajorityThe majority of development time was spent on our Faidr and Vodacast Apps. We started amortizing capitalized development expensescosts associated with Faidr during Q1 2022 and continue to amortize development expense related to Vodacast. We continue to make significant enhancements to both Apps and will continue to incur capitalized costs and additional amortization.
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General and administrative
General and administrative expenses increased by $380,022$515,948 or 59.6%38.4%, from $637,708$1,344,335 for the threesix months ended March 31,June 30, 2021 compared to $1,017,730$1,860,283 for the threesix months ended March 31,June 30, 2022. The increase resulted primarily from increased stock compensation expense related to employee stock options granted in Q3 2021 and Q1 2022.2022 partially offset by lower professional fees related to our IPO and recruiting fees incurred during 2021. Stock compensation expense was $385,908$671,829 and $16,131$31,951 for the threesix months ended March 31,June 30, 2022 and 2021, respectively.
Depreciation and amortization
Depreciation and amortization expenses increased by $173,944 or 7,968.1%,$442,092, from $2,183$5,040 for the threesix months ended March 31,June 30, 2021 compared to $176,127$447,132 for the threesix months ended March 31,June 30, 2022. The increase is entirely related to amortization of our Faidr and Vodacast Apps, which started amortization during Q1 2022 and Q4 2021, respectively.
Interest expense/Other expense,income (expense), net
Total interest expense/other expense decreased by $8,427,748,$8,175,806, from $8,428,758$8,178,841 for the threesix months ended March 31,June 30, 2021 to $1,010$3,035 for the threesix months ended March 31,June 30, 2022. The decrease was mostly related to a finance charge of $8,141,424 to interest expense related to the conversion of outstanding debt into 6.8 million shares of common stock related to the February 2021 IPO. In addition, we paid off and terminated our line of credit during 2021 and no longer are incurring interest related to the line of credit.
Liquidity and capital resources
Sources of liquidity
We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop and commercialize our Faidr and Vodacast Apps. As of March 31,June 30, 2022 and December 31, 2021 we had cash of $4,361,550$2,341,289 and $6,345,291, respectively. We reduced our future quarterly cash spend through a series of cost saving initiatives during the third quarter of 2022 and deferral of promotional activity on the Faidr and Vodacast Apps. We anticipate that operating losses and net cash used in operating activities will increasecontinue over the next 12 months as we continue to develop and market our products perform commercial trials and work on nationally launching all stations onthrough consumer conversion to subscriptions throughout 2022 and expect the Faidr App.start of subscription conversion during 2023.
In February 2021, we completed an IPO of 3,991,818 units, at $4.125 per unit, consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.54 per share. After deducting underwriters’ commissions and expenses, we received net proceeds of approximately $15.2 million. Due to the successful completion of the IPO, all of our existing convertible debt, accrued interest, accrued fees payable to related parties, and promissory notes were converted into shares of common stock.
Following the Company’s IPO in February 2021, we paid down the outstanding principal balance on our bank line of credit from $6 million to $2 million. We and the bank agreed to reduce the maximum available balance for the line of credit to $2 million.
In July 2021, certain holders of our publicly traded Series A Warrants exercised approximately 1.1 million warrants for approximately 1.1 million shares of common stock at the cash exercise price of $4.5375 per share and as a result, we received additional cash proceeds of approximately $5.0 million. In addition, we paid the remaining $2.0 million, out of our restricted cash, to pay off and terminate our line of credit.
During the year ended December 31, 2021, we have reduced our bank debt by $6.0 million, paid down a significant percentage of our accounts payable, and eliminated all deferred compensation owed to a related party.
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Cash Flow Analysis
Our cash flows from operating activities have historically been significantly impacted by revenues received, our investment in sales and marketing to drive growth, and research and development expenses. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.
The following table summarizes the statements of cash flows for the threesix months ended March 31, 2021June 30, 2022 and 2020:2021:
| Three Months Ended March 31, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | |||||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||||||
| Operating activities | $ | (1,229,996 | ) | $ | (1,827,455 | ) | (32.7% | ) | $ | (2,632,846 | ) | $ | (3,133,635 | ) | (16.0% | ) | ||||||||
| Investing activities | (665,023 | ) | (302,117 | ) | 120.1% | (1,282,433 | ) | (575,373 | ) | 122.9% | ||||||||||||||
| Financing activities | (88,722 | ) | 10,174,305 | (100.9% | ) | (88,723 | ) | 10,174,305 | (100.9% | ) | ||||||||||||||
| Change in cash | $ | (1,983,741 | ) | $ | 8,044,733 | (124.7% | ) | |||||||||||||||||
| Change in cash and restricted cash | $ | (4,004,002 | ) | $ | 6,465,297 | (161.9% | ) | |||||||||||||||||
Operating activities
Cash used in operating activities for the threesix months ended March 31,June 30, 2022 was $1,229,996,$2,632,846, primarily resulting from our net loss of $1,753,258 and change in working capital of $38,773 related to an increase in prepaid expenses,$3,803,644, partially offset by non-cash charges of $562,035$1,118,961 primarily related to stock compensation expense and depreciation and amortization. Cash used in operating activities primarily consisted of personnel-related expenditures, payments included costs of operations, and other sales efforts, research and development and administrative costs.
Cash used in operating activities for the threesix months ended March 31,June 30, 2021 was $1,827,455,$3,133,635, primarily resulting from our net loss of $9,296,498$10,050,019 and changechanges in working capital of $690,695$993,369, partially offset by non-cash charges of $7,909,753 primarily related to our conversion of outstanding debt to common stock from our February 2021 IPO. Changes in working capital primarily related to paying off outstanding accounts payable after our February 2021 IPO. This was partially offset by non-cash charges of $8,159,738 primarily related to a finance charge associated with the debt conversion from our February 2021 IPO. payable.
Cash used in operating activities primarily consisted of personnel-related expenditures, payments included costs of operations, and other sales efforts, research and development and administrative costs.
Investing activities
Cash flows used in investing activities for the threesix months ended March 31,June 30, 2022 was $665,023,and 2021, consisted primarily consisting of capitalization of software development expenses of $661,214.
Cash flows used in investing activities for the three months ended March 31, 2021 was $302,117, primarily consisting of capitalization of software development expenses of $292,075.$1,278,625 and $551,538, respectively.
Financing activities
Cash flows used in financing activities for the threesix months ended March 31,June 30, 2022 was $88,722 related to$88,723 all from cash paid by us relatedused in relation to the net-sharenet settlement of vested restricted stock units during the quarter.share-based compensation.
Cash flows provided by financing activities for the threesix months ended March 31,June 30, 2021 was $10,174,305 primarily related to the issuance of common shares for $14,822,459 related to our February 2021 IPO and $267,482 related to proceeds from ourthe second PPP Loan,loan in the amount of $267,482, partially offset by a $4,000,000 repayment ofon our line of credit, and repayment of $4,000,000 and deferred salary and related party notes payable of $930,636.
| 21 |
Funding Requirements
We historically have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $66.6 million and $64.8 million as of March 31, 2022 and December 31, 2021, respectively.inception. As of March 31,June 30, 2022, and December 31, 2021, we had cash of $4.4 million and $6.3 million, respectively.$2.3 million. Our cash is comprised primarily of demand deposit accounts and money market funds. We believe our current cash on hand should be sufficient to fund our current operating plansoperations through at least December 31, 2022. We are currently in the process of raising additional short-term funding that, if completed, would extend our current cash availability through the second quarter 2023. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and therefore would need to raise additional fundslonger term funding sooner than we anticipate. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce or eliminate our technology development and commercialization efforts.
As a part of our funding strategy, we recently implemented cost saving initiatives to ensure our cash on hand will allow us enough time to finalize certain product enhancements and optimize consumer adoption and subscription. We expect these cost saving measures to reduce our quarterly cash burn rate by $500,000 to $700,000 as compared to the second quarter 2022. With the combination of cost saving initiatives and the additional short-term funding we are pursuing, we believe our cash availability will be able to extend through the second quarter 2023.
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue the development of the Faidr and Vodacast Apps. In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. Our future funding requirements and timing will depend on many factors, including, but not limited to:
| · | the scope, progress, results and costs related to our | ||
| · | the costs, timing and ability to continue to develop our | ||
| · | effectively addressing any competing technological and market | ||
| · | avoiding and defending against intellectual property infringement, misappropriation and other claims |
Contractual Obligations
The following table summarizes our contractual obligations not on our Balance Sheet as of March 31,June 30, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
| Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1 - 3 Years | 4 - 5 Years | More Than 5 Years | Total | Less Than 1 Year | 1 - 3 Years | 4 - 5 Years | More Than 5 Years | |||||||||||||||||||||||||||||||
| Operating lease commitments: | ||||||||||||||||||||||||||||||||||||||||
| Office lease (1) | $ | 58,903 | 58,903 | -0- | -0- | -0- | $ | 37,170 | 37,170 | -0- | -0- | -0- | ||||||||||||||||||||||||||||
| Insurance premiums (2) | 275,504 | 275,504 | -0- | -0- | -0- | 165,303 | 165,303 | -0- | -0- | -0- | ||||||||||||||||||||||||||||||
| Total operating lease commitments | $ | 334,407 | 334,407 | -0- | -0- | -0- | $ | 202,473 | 202,473 | -0- | -0- | -0- | ||||||||||||||||||||||||||||
| (1) | Represents minimum payments due for the lease of office space without consideration of additional renewal options |
| (2) | Represents premium payments due related to D&O insurance policy from February 2022 – February 2023 |
Off-balance sheet arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical Accounting Policies and Estimates
Our condensed financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions.
| 22 |
A summary of our critical accounting policies is presented in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2021. There were no material changes to our critical accounting policies during the threesix months ended March 31,June 30, 2022.
Emerging growth company and smaller reporting company status
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to not “opt out” of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.
We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective at a reasonable assurance level due to the material weaknesses in internal control over financial reporting described below. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Internal Control Over Financial Reporting
In preparation of our financial statements to meet the requirements of our IPO, we determined that material weaknesses in our internal control over financial reporting existed during fiscal 2018 and remained unremediated as of March 31,June 30, 2022. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.
| 23 |
The material weaknesses we identified are related to the design and maintenance of an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately and we did not design and maintain controls to ensure adequate segregation of duties within our financial reporting function including the preparation and review of journal entries.
Remediation Activities
Management has been actively engaged in remediating the above described material weaknesses. The following remedial actions have been taken during the quarter ended March 31,June 30, 2022:
| · | continue to strengthen our internal policies, processes and reviews, including drafting of related documentation thereof; | |
| · | engage outside consultants to ensure that appropriate level of knowledge and experience is applied based on risk and complexity of transactions and tasks under review | |
| · | ||
| · | hired additional accounting resources with appropriate levels of experience, including our current Chief Financial Officer |
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above.
While progress has been made to enhance our internal control over financial reporting, we are still in the process of implementing these processes, procedures and controls. Additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. We believe the above actions will be effective in remediating the material weaknesses described above and we will continue to devote significant time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Other than the applicable remediation efforts described in “Remediation of Previously Reported Material Weaknesses”Activities” above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the firstsecond quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
| Item 1. | Legal Proceedings |
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
| Item 1A. | Risk Factors |
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our risk factors from those included in our Annual Report on Form 10-K for the year ended December 31, 2021.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In February 2021, upon the closing of our IPO, all of our outstanding pre-IPO equity and convertible debt securities automatically converted into 7,300,010 shares of common stock. The issuance of such common stock was exempt from the registration requirements of the Securities Act, pursuant to Section 3(a)(9) of the Securities Act, involving an exchange of securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. No underwriters were involved in this issuance of shares.
Use of Proceeds
On February 16, 2021, the U.S. Securities and Exchange Commission declared effective our registration statement on Form S-1 (File No. 333-235891), as amended, filed in connection with our IPO. There has been no material change in the planned use of proceeds from our IPO from that described in the related prospectus dated February 16, 2021, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act. As described in such IPO prospectus, we have used IPO proceeds to reduce our bank debt by $4.0 million, to fund a $2.0 million cash reserve to serve as collateral for our remaining $2.0 million of bank debt that replaced collateral previously provided by a related party, to pay down a significant percentage of our accounts payable as of December 31, 2020, and to pay deferred compensation owed to a related party.
In July 2021, certain holders of our publicly traded Series A Warrants exercised approximately 1.1 million warrants for approximately 1.1 million shares of common stock at the cash exercise price of $4.5375 per share and as a result, we received additional cash proceeds of approximately $5.0 million. In addition, we paid the remaining $2.0 million, out of our restricted cash, to pay off and terminate our line of credit.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the threesix months ended March 31,June 30, 2022.
| Item 3. | Defaults Upon Senior Securities |
None. |
| Item 4. | Mine Safety Disclosures |
None.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Quarterly Report are listed in the Exhibit Index below. The exhibits listed in the Exhibit Index are incorporated by reference herein.
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
___________________________
| # | Indicates management contract or compensatory plan. |
| ** | Certain information contained in this Exhibit has been redacted and appears as “XXXXX” as the disclosure of same would be a disadvantage to the Registrant in the marketplace |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AUDDIA INC. | ||
| By: | /s/ Michael Lawless | |
| Michael Lawless President, Chief Executive Officer and Director | ||
| By: | /s/ Brian Hoff | |
| Brian Hoff Chief Financial Officer | ||
Date: MayAugust 12, 2022