AUUD 10-Q Quarter ended March 31, 2021

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File No. 001-40071

AUDDIA INC.

(Exact Name of Registrant as Specified in Its Charter)

Securities registered pursuant to Section 12(b) of the Act:

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.

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 May 14, 2021, 11,291,829 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

AUDDIA INC.

2021 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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:

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.

PART I – FINANCIAL INFORMATION

Auddia Inc.

Condensed Balance Sheets (Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

Auddia Inc.

Condensed Statements of Operations (Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

Auddia Inc.

Condensed Statements of Changes in Shareholders’ Equity (Deficit) (Unaudited)

Three Months Ended March 31, 2020

Three Months Ended March 31, 2021

The accompanying notes are an integral part of these unaudited condensed financial statements.

Auddia Inc.

Condensed Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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 makes radio broadcasts and streaming audio content digitally actionable and measurable. On January 14, 2012, Clip Interactive, LLC was formed as a Colorado limited liability company 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 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. After deducting underwriters commissions and expenses, the Company received net proceeds of approximately $15.1 million and its common stock started 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.

Effective 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 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 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 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.

Reclassification of Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

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 Restricted 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 no cash equivalents at March 31, 2021 or December 31, 2020. Restricted cash at March 31, 2021 represents cash held as collateral for the outstanding balance on our line of credit.

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, 2021 and December 31, 2020, the Company had approximately $7.7 million and $0, 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.

Deferred Offering Costs

The Company capitalized certain legal, professional accounting and other third-party fees that are directly associated with in-process stock financings as deferred offering costs until such financings were consummated. After consummation of the equity financing, these costs were recorded as a reduction to additional paid-in capital generated as a result of the offering.

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 – Revenue Recognition

Legacy platform phase out

From 2014 through 2020, the Company was successful in deploying its platform across 580 major radio stations and 1.6 million monthly active users. The Company’s legacy product served the broadcast industry by providing a platform that allows for the delivery of actionable digital ads that are synchronized with broadcast and streaming audio ads. Broadcasters offer mobile and web digital interfaces to their listeners, typically for their individual stations. Our Interactive Radio Platform provides mobile and web products that provide end users (listeners) with a visual display of everything a radio station has played in recent history (referred to as a “station feed”).

In addition to displaying album art for songs played, and digital insertions for station promotions and programs (e.g., a radio station contest), the station feed also includes a digital element for each audio ad that was played. These interactive, synchronized digital ads generate additional revenue for broadcasters and allowed for the collection of meaningful advertising analytics which we present to broadcasters through an analytics dashboard.

The Company began phasing out its Interactive Radio Platform in early 2020 and ceased operations related to the legacy platform by August 1, 2020. Much of the core technology of this platform is being leveraged for re-use with our new products, Auddia and Vodacast, currently under development. Furthermore, our well established relationships with more than a dozen broadcasters through the sales, marketing and digital services operations are being maintained as we seek to deploy the Auddia App at national scale.

The Company’s legacy contracts with customers generally fell within two formats: (1) those that encompass development services, access to the Company’s interactive technology platform through a hosted business model and the ability to execute placement of spot advertising through the Company’s interactive technology platform, or (2) contracts exclusively for digital advertising placement of spot ads through the Company’s mobile apps and web players. The Company allocated the transaction price to each separate performance obligation as applicable within each contract based upon their relative selling prices.

Development service fee revenue

Revenue generated from development services were comprised of services for the development, design and customization of software applications for station branded mobile apps and web/desktop players for radio stations. The mobile apps enabled our customer’s users to interact with the live broadcast and streaming content while providing attribution to each station and enabling local and national digital monetization capabilities.

The web/desktop player provided a listening platform that enables full interactive radio capabilities for desktop users that prefer web based listening. The Company determined that the development, design, build and deployment, configuration, and customization are a bundle of professional services provided to the customer for the purpose of the Mobile and Web Desktop Apps and were considered a single performance obligation. Revenue was recognized over time as the services are satisfied and any advanced payments received were not recognized as revenue but instead was recorded in a deferred contract liability until the customer’s services were satisfied. The Company no longer provides these services.

Platform services fee revenue

Revenue generated from platform services were comprised of the customer’s use of the Company’s interactive technology platform that includes access rights to use the licensed software, software hosting, support and maintenance, data tracking analytics, advertising trafficking and monitoring of the mobile app and web/desktop player applications. The Company determined that the hosting of software, license access, support, training, maintenance and unspecified periodic upgrades or updates, monitoring hardware, interactive content management, access to content library, data and analytics dashboard, programming and Ad campaign training were a bundle of product and services that have the same period and pattern of transfer as the service to access the Company’s Platform and have been treated a single performance obligation. Revenue was recognized over time as the customer simultaneously receives and consumes the benefits provided by the Company’s platform services. The Company no longer provides these services.

Advertising revenue

The Company legacy contracts generated advertising revenue in two distinctive forms: one which was from third party advertisers that placed ads on the Company’s mobile apps and web players which were separate customer contracts whereby such advertising access was the only service and performance obligation within those contracts, and second was ad placements on the same platform but managed by the Company for its customers in connection with its contracts to provide development services and Platform access services to its customers.

The external advertising revenues were comprised of local and national interactive spots that were sourced and managed by customers or by third party service providers (such as Google), whereby the Company received a portion of the dollars spent by the advertiser. In late 2018, the Company decided to move to only internally managed digital advertising for 2019 and discontinued revenue sharing agreements with clients for advertising sourced by the client. Revenue was recognized as performance obligations were satisfied on a net basis as the Company was acting as an agent, which generally occurred as ads were delivered through the platform. We generally recognized revenue based on delivery information from the external providers campaign trafficking systems.

The internal advertising revenues were comprised of advertising fees for local and national interactive spot and local or digital only advertising campaign fees that were managed by the Company. For these advertising spots, the Company retained all the money spent on the advertising campaigns run on the Company’s interactive platform. Revenue was recognized as performance obligations were satisfied, which generally occurred as ads were delivered through the platform.

For Interactive and Digital Campaign and Spot Ad Fees which could include customer digital and interactive spot ad campaigns, interactive spot campaigns, the revenue was recognized at a point in time under the “as-invoiced” practical expedient, since customer usage driven variability was not required to be estimated but rather is allocated to the distinct time period in which the variable activity occurred.

Certain customers received platform fee credits or advertising discounts, which were considered as variable consideration in the determination of the transaction price. These performance obligations related to the fixed price arrangements were discounted ratably based on their relative standalone selling prices.

The Company is no longer providing these services.

Contract assets and liabilities

The Company had no contract assets or contract liabilities at March 31, 2021 or December 31, 2020. The Company does not have any customer contracts, as the Company no longer provides the services mentioned above.

Practical expedients and exemptions

We expensed sales commissions when incurred because the duration of the contracts for which we paid commissions were less than one year. These costs were included in the sales and marketing line item of our Statements of Operations. Currently the Company does not have any significant acquisition costs which have been incurred associated with the acquisition of its customer contracts and therefore, no deferred customer acquisition costs have been recorded.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

The following table presents revenues disaggregated by revenue source:

Note 3 – Balance Sheet Disclosures

Accounts payable and accrued liabilities consist of the following:

Note 4 – Line of Credit

The Company entered into a line of credit with a bank originally dated November 7, 2012 and amended it on November 5, 2016. On April 10, 2018 the Company refinanced its line-of-credit with a different bank and amended this agreement in July 2019 and March 2021. The available principal balance under the line of credit is currently $2,000,000, and the outstanding balance accrues interest at a variable rate based on the bank’s prime rate plus 1% (3.75% at March 31, 2021 and March 31, 2020) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2021.

The line of credit is collateralized by all assets of the Company, including $2 million of cash held in a control account at the lender. The Company also maintains 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 Company paid down the outstanding principal balance on its bank line of credit from $6 million to $2 million and the available principal balance for the line of credit was reduced from $6 million to $2 million. As of March 31, 2021, $2.0 million of our cash serves as collateral for our outstanding balance on the line of credit. The $6 million of cash collateral previously provided by two shareholders was released.

The outstanding balance on the line of credit at March 31, 2021 and December 31, 2020 was $2,000,000 and $6,000,000, respectively and the line was fully drawn as of March 31, 2021. The shareholder who previously provided the $2,000,000 control account had a collateral agreement with the Company which is described in Note 5. This agreement 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 our convertible notes, such that at December 31, 2020 the balance of the convertible notes, including accrued interest, was $2,295,305. 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 2,066,176 shares of common stock at discounts ranging from 50% to 75% of the IPO price.

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 $2.0 million. 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 bears interest at 33% annually and had a maturity date of December 31, 2021. The fees accruing on the collateral arrangement are 33% percent of the collateral amount annually plus an annual renewal fee of $50,000. Interest expense for the three months ended March 31, 2021 and 2020 was $120,381 and $212,952, 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.

In conjunction with the February 2021 IPO, the notes payable and accrued interest due to this shareholder converted to 1,667,859 shares of common stock.

Promissory notes payable

During the twelve months ended December 31, 2020, the Company issued, to a number of existing shareholders, in four separate tranches, $1,857,764 of Promissory Notes that accrue interest at a rate of 6% per year and mature on December 31, 2021. 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, the notes and accrued interest would convert into equity 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.

In conjunction with the February 2021 IPO, all the Promissory Notes converted into 3,080,535 shares of common stock.

The Company recognized a finance charge to interest expense of $8,141,424 related to the conversion of the convertible notes, notes payable to related parties and promissory notes during the three months ended March 31, 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 2021.

During 2019, the Company issued notes payable (the "Notes") to three related parties for $80,000, $200,000 and $50,000, respectively. The Notes did not accrue interest or have a 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 owed a total of $17,197 for services by the Company, also agreed to convert their payables into convertible Notes. During 2019 the Company issued a 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.

In October 2019, a shareholder obtained $400,000 of short term financing from an unrelated lender. The shareholder then agreed to make the proceeds of that short term financing available to the Company. In exchange, the Company assumed responsibility for all payments and charges (including principal, interest and fees) required under such short term financing agreement. Under the agreement the Company was advanced $188,000, net of $12,000 in closing fees, and the remaining $200,000 was put into an escrow account owned and controlled by the shareholder. A loan financing fee in the amount of $100,000 is due upon maturity, of which the amount relating to 2019 of $75,000 is included in accrued expenses at December 31, 2019. In December 2019, the Company made a principal payment in the amount of $57,203, and accordingly, the outstanding principal balance was $142,797 at December 31, 2019, and is included in Notes payable to related parties on the balance sheet. The remaining balance of $242,797 which included principal and loan financing fees, was repaid in January 2020.

In February 2020, the Company obtained a new $500,000 short term loan from the same 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 increases with the length of the payback period and is maximized at $165,000 after month five. The outstanding balance was repaid in February 2021.

Cares Act Paycheck Protection Program loan

In April 2020, the 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 matures in April 2022 and the Second Loan matures in January 2023. The PPP Loans bear interest at a rate of 1% per annum. Beginning November 2020, the Company is 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 Loan 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 contain 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.

Pursuant to the terms of the CARES Act and the PPP, the Company plans to apply to the lender for forgiveness for the amount due on the PPP Loans, which it has already initiated. The amount eligible for forgiveness is 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. While the Company expects 100% of the loan to be forgiven, no assurance can be given that the Company will obtain forgiveness of the PPP Loans in whole or in part.

Note 7 – Commitments and Contingencies

Operating Lease

The Company leases approximately 3,000 square feet of office space under a non-cancelable operating sublease. Rent expense was $18,053 and $18,639 for the three months ended March 31, 2021 and 2020, respectively. In October 2019, the Company entered into a new sublease, with monthly rent of $5,000 plus a pro-rata share of utilities. In October 2020, the Company renewed this sublease for an additional seven months, on the same terms, which will expire on April 30, 2021. We recently entered into a new sublease for a new principal office and is discussed in more detail in Note 10.

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.

Collateral Fees

The Company previously had a commitment to pay annual collateral fees as described in Note 6. This commitment terminated in March 2021.

Note 8 - Share-based Compensation

Stock Options

The following table presents the activity for stock options outstanding:

The following table presents the composition of options outstanding and exercisable:

________________________

* Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively.

Warrants

The following table presents the activity for warrants outstanding:

In connection with the February 2021 IPO, the Company issued 3,991,818 warrants to purchase shares of common stock. The Company also issued to its underwriters 598,772 warrants to cover over-allotments. All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 4.79 years as of March 31, 2021.

Note 9 – Net Loss Per Share

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, 2021 and 2020, 2,750,331 shares and 644,751 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 April 2021, the Company entered into a lease agreement for a new primary office space in Boulder, CO comprising of 8,639 square feet. The lease will begin 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.

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, 2020, which was filed with the SEC on March 31, 2020. 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, 2020 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, Auddia and Vodacast.

Auddia 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 Auddia 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 technology platform to bring to market a premium AM/FM radio listening experience through the Auddia App. The Auddia App is intended to be downloaded by consumers who will pay a subscription fee in order 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 the Auddia App 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 Auddia App 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 are currently finalizing development and testing of the minimally viable product (“MVP”) version of the Auddia App and expect to initiate the first consumer trials in the second quarter of 2021 with a full commercial launch to follow later in 2021.

We have also developed a new podcasting platform called Vodacast. Vodacast is a podcasting app that provides an interactive digital feed to supplement podcast audio with additional content to tell deeper stories and give podcasters access to digital revenue for the first time. The platform is unique in that it is designed to add new monetization channels for podcasters while delivering a superior content experience for listeners. Vodacast is a synchronized digital feed that listeners can view and interact with and which accompanies each episode. Podcasters and their digital teams 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 a podcast episode. 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 copy and web links. This feed appears fully synchronized in the Vodacast mobile app, and it can also be hosted and accessed independently (e.g., through any browser), making the content feed universally distributable.

Vodacast will also introduce an 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, but it 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. These revenue channels are expected to be available to Podcasters starting late 2021 and into 2022.

The Vodacast mobile app is available today through the iOS and Android app stores.

Components of our results of operations

Operating expenses

Direct costs of services

Direct cost of services consist 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 Auddia and Vodacast Apps.

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 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 impaired and expensed during the period of such determination.

We expect to continue to incur substantial research and development expenses and capitalization in the future as we continue to develop our Auddia and Vodacast apps.

Sales and marketing

Our sales and marketing expenses consist primarily of salaries and consulting services, related to the sales, promotion and commercial trials related to our products. We expect our sales and marketing expenses to continue to increase as we look to commercialize and generate revenue for our products to attract and retain users.

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 potential 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.

Results of operations

Comparison of the three months ended March 31, 2021 and 2020

The following table summarizes our results of operations:

Revenue

Total revenues were $0 for the three months ended March 31, 2021, compared to $64,776 for the three months ended March 31, 2020. The decrease in revenue can be attributed to the August 2020 termination of our legacy platform which eliminated all platform fee and advertising revenue while we continue to develop the new Auddia and Vodacast products to establish new revenue streams.

Direct cost of services

Direct cost of services decreased by $81,269 or 59%, from $138,663 for the three months ended March 31, 2020 compared to $57,394 for the three months ended March 31, 2021. This decrease primarily resulted from the termination of our legacy services and the decreased need for hosting, staff reductions to the team working on the current platform, and other related direct expenses.

Research and development

Research and development expenses increased by $2,442 or 5%, from $44,555 for the three months ended March 31, 2020 to $46,997 for the three months ended March 31, 2021 primarily related to capitalization of research and development time. During the first quarter of 2021, the majority of the research and development efforts were spent on our new apps, Vodacast and Auddia, which have not been commercially released, therefore $292,075 of research and development expenses were capitalized in the three months ended March 31, 2021 compared to $194,452 capitalized in the three months ended March 31, 2020.

Sales and marketing

Sales and marketing expenses increased by $26,349 or 27%, from $97,104 for the three months ended March 31, 2020 compared to $123,458 for the three months ended March 31, 2021 as we increased marketing expenses primarily related to the promotion and development of the Auddia app.

General and administrative

General and administrative expenses increased by $22,994 or 4%, from $616,897 for the three months ended March 31, 2020 compared to $639,891 for the three months ended March 31, 2021. The increase resulted primarily from increased costs related to being a public company and having higher legal and other professional fees due to preparing to operate as a public company.

Interest expense/Other expense, net

Total interest expense/other expense increased by $8,028,315, from $400,548 for the three months ended March 31, 2020 compared to $8,428,863 for the three months ended March 31, 2021. The increase was due almost entirely to a finance charge to interest expense related to the conversion of outstanding debt of 6.8 million shares of common stock related to the February 2021 IPO.

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 Auddia and Vodacast apps. As of March 31, 2021 and December 31, 2020 we had cash (including restricted cash) of $8.2M and $0.1M, respectively. We anticipate that operating losses and net cash used in operating activities will increase over the next 12 months as we continue to develop our products and perform commercial trials on the Auddia app.

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, the Company received net proceeds of approximately $15.2 million. Due to the successful completion of the IPO, all the Company’s 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, the Company paid down the outstanding principal balance on its bank line of credit from $6 million to $2 million. The Company and the bank agreed to reduce the maximum available balance for the line of credit to $2 million. The outstanding balance under the line of credit accrues interest at a variable rate based on the bank’s prime rate plus 1% (3.75% at March 31, 2021) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2021. The line of credit is collateralized by all assets of the Company. During the three months ended March 31, 2021, we have reduced our bank debt by $4.0 million, used $2.0 million of our cash to serve as collateral for our remaining $2.0 million of bank debt that replaces collateral previously provided by a related party, paid down a significant percentage of our accounts payable, and eliminated all deferred compensation owed to a related party.

Prior to our IPO, we funded our operations from cash flows generated from operations and cash from the sale of equity securities and debt financing.

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 three months ended March 31, 2021 and 2020:

Operating activities

Cash used in operating activities for the three months ended March 31, 2021 primarily consisted of 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 three months ended March 31, 2021 consisted primarily of capitalization of software development expenses of $292,075.

Financing activities

Cash flows provided by financing activities for the three months ended March 31, 2021 increased primarily related to the issuance of common shares for $14,822,459, related to our February 2021 IPO offset by a repayment of our line of credit of $4,000,000 and deferred salary and related party notes payable of $930,636.

Funding Requirements

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $60.7M and $51.4M as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, we had cash (including restricted cash) of $8.2M and $0.1M, respectively. We believe that the net proceeds from our February 2021 IPO, will be sufficient to fund our current operating plans through at least the next 12 months. 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 need to raise additional funds 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.

Our cash is comprised primarily of demand deposit accounts, money market funds and certificates of deposit. We believe our existing cash and cash generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months.

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue the development of the Auddia 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 will depend on many factors, including, but not limited to:

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, 2020. There were no material changes to our critical accounting policies during the three months ended March 31, 2021.

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.

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.

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, 2021. 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 March 31, 2021. We added additional accounting resources with appropriate levels of experience, including a new Chief Financial Officer, and reallocated responsibilities across the accounting organization to ensure that the appropriate level of knowledge and experience is applied based on risk and complexity of transactions and tasks under review; and continue to strengthen our internal policies, processes and reviews, including drafting of related documentation thereof.

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” 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 first quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

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.

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, 2020. 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, 2020.

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 replaces collateral previously provided by a related party, to pay down a significant percentage of our accounts payable, and to pay deferred compensation owed to a related party.

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during the three months ended March 31, 2021.

None.

None.

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.

____________________________

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.

Date:  May 14, 2021