UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| 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.
(Exact Name of Registrant as Specified in Its Charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| Address of Principal Executive Offices | Zip Code |
(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.
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).
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 ☐ |
| 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
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As of November 14, 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
| Page No. | ||||
| PART I – FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements (Unaudited) | 1 | ||
| Condensed Balance Sheets | 1 | |||
| Condensed Statements of Operations | 2 | |||
| Condensed Statements of Changes in Stockholders’ Equity | 3 | |||
| Condensed Statements of Cash Flows | 4 | |||
| Notes to Condensed Financial Statements | 5 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 | ||
| Item 4. | Controls and Procedures | 22 | ||
| PART II – OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 24 | ||
| Item 1A. | Risk Factors | 24 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||
| Item 3. | Defaults Upon Senior Securities | 24 | ||
| Item 4. | Mine Safety Disclosures | 24 | ||
| Item 5. | Other Information | 24 | ||
| Item 6. | Exhibits | 25 | ||
| Signatures | 26 | |||
| 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 | ||||||||
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaids and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Software development costs, net | ||||||||
| Prepaids and other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Share-based compensation liability | ||||||||
| Total current liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock - $ par value, authorized and shares issued and outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| Common stock - $ par value, authorized and and shares issued and outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 1 |
Auddia Inc.
Condensed Statements of Operations (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Finance charge – convertible debt | ( | ) | ||||||||||||||
| PPP loan extinguishment | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest income | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 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 Stockholders’ Equity (Unaudited)
Nine Months Ended September 30, 2021
| Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||
| Shares | Value | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Issuance of common shares | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Conversion of debt obligations | ||||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
Nine Months Ended September 30, 2022
| Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||
| Shares | Value | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercise of restricted stock units and warrants | ( | ) | ||||||||||||||||||
| Share-based compensation | – | |||||||||||||||||||
| Reclassification of share-based compensation award to liability | – | ( | ) | ( | ) | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 3 |
Auddia Inc.
Condensed Statements of Cash Flows (Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Finance charge associated with debt to equity conversion | ||||||||
| Depreciation and amortization | ||||||||
| Share-based compensation | ||||||||
| Gain on PPP loan extinguishment | ( | ) | ||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaids and other non-current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Software capitalization | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net settlement of share-based compensation awards | ( | ) | ||||||
| Proceeds from issuance of common shares | ||||||||
| Repayments of related party debt and deferred salary | ( | ) | ||||||
| Repayments of line of credit | ( | ) | ||||||
| Proceeds from issuance of PPP loan | ||||||||
| Proceeds from issuance of promissory notes payable | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash activity: | ||||||||
| Shares issued for conversion of indebtedness | ||||||||
| PPP loan extinguishment | $ | $ | ( | ) | ||||
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 and Future Funding Requirements
The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash equivalents. The Company had
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 September 30, 2022 and December 31, 2021, the Company had $
The Company historically has incurred significant
losses and negative cash flows from operations since our inception. As of September 30, 2022, the Company had cash of approximately $
The Company believes that its cash on hand as of September 30, 2022 combined with the $2.0 million of cash received from the November 14, 2022 secured debt financing plus funds available from the equity line facility will be sufficient to fund current operations for the next twelve months. The Company has based these estimates, however, on assumptions that may prove to be wrong, and could spend available financial resources much faster than we currently expect. The Company will need to raise additional funds to continue funding our technology development and commercialization efforts beyond twelve months. Management intends to secure such additional funding.
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 $
Revenue Recognition
Revenue will be measured according to Accounting Standards Codification (“ASC”) 606, Revenue – Revenue from Contracts with Customers, and will be recognized based on consideration specified in a contract with a customer and will 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.
| 6 |
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.
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:
| September 30 2022 | December 31, 2021 | |||||||
| Computers and equipment | $ | $ | ||||||
| Furniture | ||||||||
| Software | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
| Software development costs | $ | |||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Total software development costs, net | $ | $ | ||||||
The Company recognized depreciation expense of
$
| 7 |
Note 3 – Balance Sheet Disclosures
Accounts payable and accrued liabilities consist of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Credit cards payable | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
Note 4 – Line of Credit
The Company had a line of credit which 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 nine months ended September 30, 2022 and 2021 was $
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 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
The Company had convertible notes outstanding
at December 31, 2020 in the amount of $
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 $
In conjunction with the February 2021 IPO, the notes payable and accrued interest due to this shareholder were converted to shares of common stock.
| 8 |
Promissory notes payable
The Company had promissory notes payable outstanding
that were scheduled to mature on December 31, 2021 and accrue interest at 6%. The 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 nine months ended September 30, 2022 and 2021 was $
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 $
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 $
The Company had convertible notes payable to related
parties in the amounts of $
The Company had a short term loan of $
Cares Act Paycheck Protection Program loan
The Company entered into a promissory note evidencing
an unsecured loan (the “First Loan”) in the amount of $
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
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 $
| 9 |
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 its 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 as follows:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Rent expense | $ | $ | ||||||||||||||
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.
Stock Options
The following table presents the activity for stock options outstanding:
| Weighted | ||||||||
| Non-Qualified | Average | |||||||
| Options | Exercise Price | |||||||
| Outstanding - December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Forfeited/canceled | ( | ) | ||||||
| Exercised | ||||||||
| Outstanding – September 30, 2022 | $ | |||||||
The following table presents the composition of options outstanding and exercisable:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||
| Exercise Prices | Number | Price* | Life* | Number | Price* | ||||||||||||||||
| $2.70 | $ | $ | |||||||||||||||||||
| $2.90 | $ | $ | |||||||||||||||||||
| $4.26 | $ | $ | |||||||||||||||||||
| $2.79 | $ | $ | |||||||||||||||||||
| $1.79 | $ | $ | |||||||||||||||||||
| $1.21 | $ | $ | |||||||||||||||||||
| Total – September 30, 2022 | $ | $ | |||||||||||||||||||
________________________
| * |
| 10 |
During the nine months ended September 30, 2022, the Company granted 683,136 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.
Restricted Stock Units
The following table presents the activity for restricted stock units outstanding:
| Weighted | ||||||||
| Restricted | Average | |||||||
| Stock Units | Exercise Price | |||||||
| Outstanding - December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Forfeited/canceled | $ | |||||||
| Vested/issued | ( | ) | ||||||
| Outstanding – September 30, 2022 | $ | |||||||
During the nine months ended September 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 four year vesting schedule.
During the nine months ended September 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 September 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 nine months ended September 30, 2022 and 2021, respectively. The remaining unvested share-based compensation expense of $ is expected to be recognized over the next 45 months.
Warrants
The following table presents the activity for warrants outstanding:
| Weighted | ||||||||
| Warrants | Average | |||||||
| Outstanding | Exercise Price | |||||||
| Outstanding - December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Forfeited/cancelled/restored | ||||||||
| Exercised | ( | ) | ||||||
| Outstanding – September 30, 2022 | $ | |||||||
In connection with the February 2021 IPO, the Company issued Series A warrants to purchase shares of common stock. 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.
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During the nine months ended September 30, 2022
certain holders of our Pre-IPO warrants exercised
All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately years as of September 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 September 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
On November 14, 2022, the Company entered into a secured debt financing agreement (the “Convertible Note”) with one accredited investor who is a current existing stockholder of the Company. The Convertible Note has a face value of $2.2 million with a 10% discount, in which the Company will receive $2 million in net proceeds. The Convertible Note has a maturity date of May 31, 2023 and can be extended at the Company’s option to November 30, 2023. The Convertible Note bears interest at 10%. The Convertible Note includes 300,000 warrants at a strike price of 150% of the most recent closing price. In addition, on November 14, 2022, the Company entered into an equity line stock purchase agreement with one accredited investor. The equity line facility is for up to $10 million of potential sales subject to certain limitations, would occur, at the Company's option, from time to time over the period ending December 31, 2023. The equity line will be structured as a registered take down off of the Company's existing universal shelf S-3 registration statement which was declared effective on April 18, 2022.
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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 look 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, Faidr 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 launched the Faidr App to include all major U.S. radio stations on February 15, 2022 and launched marketing campaigns for Faidr to build an audience and demonstrate consumer interest. We are currently providing consumers a free trial of the App and started trialing subscriptions with a subset of consumers in late second quarter. We have been 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, including podcasting, some of which will become available in the App during the year. We are running additional subscription trials during the first part of the fourth quarter and expect to provide initial consumer subscription metrics during the fourth 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 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 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. Because 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 currently 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. During this time, we have paused direct marketing promotion related to the Vodacast App while we 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 September 30, 2022, we had an accumulated deficit of approximately $70.0 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 again sometime in the future, particularly if and as we:
| · | continue training our proprietary AI technology and make additional product enhancements; | |
| · | gain significant consumer interest in our products and increase marketing promotion to drive users to our Apps and convert users to subscribers; | |
| · | identify and license new content that will add value to our products and drive consumer interest; | |
| · | 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. |
On November 14, 2022, the Company entered into a secured debt financing agreement with one accredited investor who is an existing stockholder of the Company. The Company will receive $2 million in net proceeds from this financing. In addition, on November 14, 2022, the Company entered into an equity line stock purchase agreement with one accredited investor. The equity line facility is for up to $10 million of potential sales subject to certain limitations, would occur, at the Company's option, from time to time over the period ending December 31, 2023. The equity line will be structured as a registered take down off the Company's existing universal shelf S-3 registration statement which was declared effective on April 18, 2022. We may still need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from 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 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.
As of September 30, 2022, we had cash of approximately $1.0 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.
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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. 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 period. We expect our sales and marketing expenses to fluctuate 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 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 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.
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.
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Results of operations
Comparison of the three months ended September 30, 2022 and 2021
The following table summarizes our results of operations:
| Three Months Ended September 30, | ||||||||||||
| 2022 | 2021 | Increase/(Decrease) | ||||||||||
| Revenue | $ | – | $ | – | $ | – | ||||||
| Operating expenses: | ||||||||||||
| Direct costs of service | 32,712 | 36,501 | (3,789 | ) | ||||||||
| Sales and marketing | 298,924 | 209,207 | 89,717 | |||||||||
| Research and development | 181,596 | 119,321 | 62,275 | |||||||||
| General and administrative | 540,220 | 1,608,344 | (1,068,124 | ) | ||||||||
| Depreciation and amortization | 274,839 | 78,755 | 196,084 | |||||||||
| Total operating expense | 1,328,291 | 2,052,128 | (723,837 | ) | ||||||||
| Loss from operations | (1,328,291 | ) | (2,052,128 | ) | 723,837 | |||||||
| Other income (expense), net: | (2,023 | ) | 2,725 | (4,748 | ) | |||||||
| Net loss | $ | (1,330,314 | ) | $ | (2,049,403 | ) | $ | 719,089 | ||||
Revenue
Total revenues were $0 for the three months ended September 30, 2022 and September 30, 2021. We are continuing to develop the new Faidr and Vodacast products to establish new revenue streams and are currently running our first subscription trials and expect to start generating our first revenue during the fourth quarter of 2022.
Direct cost of services
Direct cost of services decreased $3,789 or 10.4%, from $36,501 for the three months ended September 30, 2021 compared to $32,712 for the three months ended September 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 $89,717 or 42.9%, from $209,207 for the three months ended September 30, 2021 to $298,924 for the three months ended September 30, 2022 due to our increase in promotional activity related to the national launch of our Faidr App. The increase in marketing promotion was initially focused on understanding consumer interest and demand for our Faidr App and is shifting focus around user behavior and retention on our App.
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Research and development
Research and development expenses increased by $62,275 or 52.2%, from $119,321 for the three months ended September 30, 2021 to $181,596 for the three months ended September 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 $576,491 and capitalized software expenses of $394,893 for the three months ended September 30, 2022 as compared to staffing and related development costs of $462,987 and capitalized software expenses of $353,418 for the three months ended September 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 decreased by $1,068,124 or 66.4%, from $1,608,344 for the three months ended September 30, 2021 compared to $540,220 for the three months ended September 30, 2022. The decrease resulted primarily from decreased stock compensation expense related to employee stock options and lower professional and recruiting fees that were incurred during 2021.
Depreciation and amortization
Depreciation and amortization expenses increased by $196,084 or 249%, from $78,755 for the three months ended September 30, 2021 compared to $274,839 for the three months ended September 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 $4,748 or 174.2%, from $2,725 for the three months ended September 30, 2021 to ($2,023) for the three months ended September 30, 2022. The decrease was entirely related to interest expense.
Comparison of the nine months ended September 30, 2022 and 2021
The following table summarizes our results of operations:
| Nine Months Ended September 30, | ||||||||||||
| 2022 | 2021 | Increase/(Decrease) | ||||||||||
| Revenue | $ | – | $ | – | $ | – | ||||||
| Operating expenses: | ||||||||||||
| Direct costs of service | 128,806 | 152,532 | (23,726 | ) | ||||||||
| Sales and marketing | 1,396,010 | 472,322 | 923,688 | |||||||||
| Research and development | 481,611 | 261,977 | 219,634 | |||||||||
| General and administrative | 2,400,503 | 2,952,679 | (552,176 | ) | ||||||||
| Depreciation and amortization | 721,971 | 83,795 | 638,176 | |||||||||
| Total operating expense | 5,128,901 | 3,923,305 | 1,205,596 | |||||||||
| Loss from operations | (5,128,901 | ) | (3,923,305 | ) | (1,205,596 | ) | ||||||
| Other income (expense), net: | (5,058 | ) | (8,176,116 | ) | 8,171,058 | |||||||
| Net loss | $ | (5,133,959 | ) | $ | (12,099,421 | ) | $ | 6,965,462 | ||||
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Revenue
Total revenues were $0 for the three months ended September 30, 2022 and September 30, 2021. We are continuing to develop the new Faidr and Vodacast products to establish new revenue streams and are currently running our first subscription trials and expect to start generating our first revenue during the fourth quarter of 2022.
Direct cost of services
Direct cost of services decreased by $23,726 or 15.6%, from $152,532 for the nine months ended September 30, 2021 compared to $128,806 for the nine months ended September 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 $923,688 or 195.6%, from $472,322 for the nine months ended September 30, 2021 to $1,396,010 for the nine months ended September 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 initially focused on understanding consumer interest and demand for our Faidr App and has continued with shifting focus around user behavior and retention on our App.
Research and development
Research and development expenses increased by 219,634 or 83.8%, from $261,977 for the nine months ended September 30, 2021 to $481,611 for the nine months ended September 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 $2,155,128 and capitalized software expenses of $1,673,517 for the nine months ended September 30, 2022 as compared to staffing and related development costs of $1,161,880 and capitalized software expenses of $904,956 for the nine months ended September 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 decreased by $552,176 or 18.7%, from $2,952,679 for the nine months ended September 30, 2021 compared to $2,400,503 for the nine months ended September 30, 2022. The decrease resulted primarily from decreased stock compensation expense related to employee stock options and lower professional and recruiting fees that were incurred during 2021.
Depreciation and amortization
Depreciation and amortization expenses increased by $638,176 or 761.6%, from $83,795 for the nine months ended September 30, 2021 compared to $721,971 for the nine months ended September 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 expense decreased by $8,171,058 or 99.9%, from $8,176,116 for the nine months ended September 30, 2021 to $5,058 for the nine months ended September 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.
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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 September 30, 2022 and December 31, 2021 we had cash of $957,130 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 continue over the next 12 months as we continue to develop and market our products and work through consumer conversion to subscriptions throughout 2022 and expect the 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.
As described in more detail in Note 10, on November 14, 2022, the Company entered into a secured debt financing agreement for $2.0 million and an equity line facility for additional potential proceeds.
The Company believes that its cash on hand as of September 30, 2022 combined with the $2.0 million of cash received from the November 14, 2022 secured debt financing plus funds available from the equity line facility will be sufficient to fund current operating for the next twelve months. The Company has based these estimates, however, on assumptions that may prove to be wrong, and could spend available financial resources much faster than we currently expect. The Company will need to raise additional funds to continue funding our technology development and commercialization efforts beyond twelve months. Management intends to secure such additional funding.
Cash Flow Analysis
Our cash flows from operating activities have historically been significantly impacted by 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 nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | ||||||||||||
| 2022 | 2021 | % Change | ||||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | (3,622,112 | ) | $ | (4,320,114 | ) | (16.2% | ) | ||||
| Investing activities | (1,677,326 | ) | (967,425 | ) | 73.4% | |||||||
| Financing activities | (88,723 | ) | 13,251,608 | (100.7% | ) | |||||||
| Change in cash | $ | (5,388,161 | ) | $ | 7,964,069 | (167.7% | ) | |||||
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Operating activities
Cash used in operating activities for the nine months ended September 30, 2022 was $3,622,112, primarily resulting from our net loss of $5,133,959, partially offset by non-cash charges of $1,420,457 primarily related to stock compensation expense and depreciation and amortization.
Cash used in operating activities for the nine months ended September 30, 2021 was $4,320,114, primarily resulting from our net loss of $12,099,421 and changes in working capital of $944,792, partially offset by non-cash charges of $8,724,099 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.
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 nine months ended September 30, 2022 and 2021, consisted primarily of capitalization of software development expenses of $1,673,517 and $904,957, respectively.
Financing activities
Cash flows used in financing activities for the nine months ended September 30, 2022 was $88,723 all from cash used in relation to the net settlement of share-based compensation.
Cash flows provided by financing activities for the nine months ended September 30, 2021 was $13,251,608 primarily related to the issuance of common shares for $14,822,459 related to our February 2021 IPO, $4,953,552 related to exercises of our Series A warrants in July 2021, and proceeds from the second PPP loan in the amount of $267,482, partially offset by a $6,000,000 repayment on our line of credit, and repayment of deferred salary and related party notes payable of $930,636.
Funding Requirements
We historically have incurred significant losses and negative cash flows from operations since our inception. As of September 30, 2022, we had cash of approximately $1.0 million. 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 to approximately $1.0 million. We recently entered into a debt financing agreement for $2.0 million in net proceeds. In addition, we entered into an equity line stock purchase agreement for up to $10.0 million in potential future proceeds, subject to certain limitations. We believe these combined financing arrangements, should capitalize our continued operations through Q3 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 funding sooner than we anticipate.
We expect to continue to incur costs associated with operating as a public company, including 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 Faidr App and obtaining market adoption and subscription conversion; | ||
| · | the costs, timing and ability to continue to develop our technology; | ||
| · | effectively addressing any competing technological and market developments; | ||
| · | avoiding and defending against intellectual property infringement, misappropriation and other claims |
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Contractual Obligations
The following table summarizes our contractual obligations not on our Balance Sheet as of September 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 | ||||||||||||||||||||
| Total | Less Than 1 Year | 1 – 3 Years | 4 – 5 Years | More Than 5 Years | ||||||||||||||||
| Operating lease commitments: | ||||||||||||||||||||
| Office lease (1) | $ | 17,088 | 17,088 | – | – | – | ||||||||||||||
| Insurance premiums (2) | 82,651 | 82,651 | – | – | – | |||||||||||||||
| Total operating lease commitments | $ | 99,739 | 99,739 | – | – | – | ||||||||||||||
| (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.
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 nine months ended September 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.
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| 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 I 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 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.
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 September 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 | |
| · | developing internal control documentation and risk assessments along with engage outside consultants to assist in the design, implementation and documentation of internal controls to address the relevant risks |
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.
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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 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 second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.
On November 14, 2022, the Company entered into a secured debt financing agreement with one accredited investor who is an existing stockholder of the Company. The Company will receive $2 million in net proceeds from this financing. In addition, on November 14, 2022, the Company entered into an equity line stock purchase agreement with one accredited investor. The equity line facility is for up to $10 million of potential sales, subject to certain limitations, would occur, at the Company's option, from time to time over the period ending December 31, 2023. These proceeds will be used to fund ongoing operations.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the nine months ended September 30, 2022.
| Item 3. | Defaults Upon Senior Securities |
| None. |
| Item 4. | Mine Safety Disclosures |
None.
| Item 5. | Other Information |
None.
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| 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 |
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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 | ||
Date: November 14, 2022
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