AUDDIA INC. 10-K

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been traded on the Nasdaq Stock Market under the symbol “AUUD” since our IPO on February 17, 2021. Our Series A Warrants have been traded on the Nasdaq Stock Market under the symbol “AUUDW” since our IPO on February 17, 2021. As of March 15, 2021, there were approximately 130 holders of record of our common stock and 130 holders of record of our Series A warrants. These numbers are based on the actual number of holders registered at such date and does not include holders whose shares are held in “street name” by brokers and other nominees. Dividends We have never paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Securities Authorized for Issuance under Equity Compensation Plans The following table provides certain information as of December 31, 2020, with respect to all of our equity compensation plans in effect on that date: Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Equity Compensation Plans Approved by Stockholders (1) 300,353 $ 3.65 0 Equity Compensation Plans Not Approved by Stockholders – – – Total 300,353 $ 3.65 0 (1) Consists of stock options granted under the Clip Interactive, LLC 2013 Equity Incentive Plan, as amended. We ceased granting awards under the 2013 Plan upon the implementation of the 2021 Plan described below. The Company’s 2021 Equity Incentive Plan, which became effective upon the completion of the IPO in February 2021, serves as the successor equity incentive plan to the 2013 Plan. The 2021 Plan and has 1,500,000 shares of common stock available for issuance. The 2021 Equity Incentive Plan contains an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2022 and ending in 2030 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors. Recent Sales of Unregistered Securities During the year ended December 31, 2020, the Company sold to investors $404,601 of our convertible notes. As described in Note 11 to our financial statements, all of these convertible notes converted into shares of common stock in connection with our February 2021 IPO. 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 as of December 31, 2020, and to pay deferred compensation owed to a related party. 25 Issuer Purchases of Equity Securities We did not repurchase any of our equity securities during the period covered by this Annual Report. Item 6. Selected Financial Data Our selected financial data set forth below should be read together with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto, which are included elsewhere in this Form 10-K (dollars in thousands, except per share data). Year Ended December 31, 2020 2019 Statements of income data: Total revenues $ 110,924 $ 458,826 Operating income $ (2,382,850 ) $ (3,802,464 ) Net income $ (4,051,221 ) $ (5,230,245 ) Earnings per share, basic $ (8.35 ) $ (11.78 ) Earnings per share, diluted $ (8.35 ) $ (11.78 ) As of December 31, 2020 2019 Balance sheets data: Cash and cash equivalents $ 117,914 $ 290,231 Total assets $ 2,311,768 $ 1,860,639 Total Liabilities $ 15,415,018 $ 11,089,516 Total deficiency in shareholders' equity $ (13,103,250 ) $ (9,228,877 ) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited and unaudited financial statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer Auddia Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted. Overview 26 Results of operations Years ended December 31, 2020 and 2019 Operating activities: The following table summarizes our results of operations: 2020 2019 Increase/ (Decrease) Revenue $ 110,924 $ 458,826 $ (347,902 ) Operating expenses: Direct Costs of Service 645,573 1,011,401 (365,828 ) Research and development 105,399 312,614 (207,215 ) General and administrative 1,663,990 2,804,815 (1,140,825 ) Sales & Marketing 78,811 132,460 (53,649 ) Total operating expense 2,493,774 4,261,290 (1,767,516 ) Loss from operations (2,382,850 ) (3,802,464 ) (1,419,614 ) Other income (expense), net: (1,668,371 ) (1,427,781 ) 240,590 Net loss $ (4,051,221 ) $ (5,230,245 ) $ (1,179,024 ) Years ended December 31, 2020 and 2019 Total revenues. Total revenues for the twelve months ended December 31, 2020 were $110,924 which was a decline of $347,902 or 75.8%, from $458,826 from the twelve months ended December 31, 2019. The decrease in revenues can be attributed to (i) the July 1, 2020 termination of our Legacy Platform which caused yearly Platform Fees to decrease to $85,800 for the year ended December 31, 2020 from $249,775 for the year ended December 31, 2019 and (ii) a similar large decrease in advertising revenue, which declined to $25,124 for the year ended December 31, 2020 compared to $209,051 for the year ended December 31, 2019. Direct Cost of Services. Direct Cost of Services decreased $365,828 or 36.2%, from $1,011,401 for the year ended December 31, 2019 compared to $645,573 for the twelve months ended December 31, 2020. 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 decreased by $207,215 or 66.3%, from $312,614 for the twelve months ended December 31, 2019 compared to $105,399 for the twelve months ended December 31, 2020. During 2020, the majority of the research and development efforts were spent on our new apps, Vodacast and Auddia, which had not been commercially released, therefore $867,578 of research and development expenses were capitalized in the year ended December 31, 2020 compared to $704,167 capitalized in the year ended December 31, 2019. Sales and marketing. Sales and marketing expenses decreased by $53,649 or 40.5%, from $132,460 for the twelve months ended December 31, 2019 compared to $78,811 for the twelve months ended December 31, 2020 as the Company reduced marketing expenses tied to the legacy software platform. General and administrative . General and administrative expenses decreased by $1,140,825 or 40.7%, from $2,804,815 for the twelve months ended December 31, 2019 compared to $1,663,990 for the year ended December 31, 2020. The decrease resulted primarily from decreased consulting and financial advisory fees and decreased amortization of stock option compensation expense. 27 Interest expense/Other expense, net. Total Interest expense/other expense increased by $240,590, or 16.8%, from $1,427,781 for the twelve months ended December 31, 2019 compared to $1,668,371 for the twelve months ended December 31, 2020. The increase was due almost entirely to an increased debt levels, specifically the convertible debt as well as Notes Payable, debt to related parties, as well as interest payments on the Company’s collateral agreement. Net income (loss). We had a net loss of $4,051,221 for the twelve months ended December 31,2020 compared to a net loss of $5,230,245 for the twelve months ended December 31, 2019. The decreased loss resulted from the combination of the decrease in revenues and the decreased operating expenses as discussed above. Income taxes Since our inception in 2012, until the corporate conversion in February 2021, we were organized as a Colorado limited liability company for federal and state income tax purposes and treated as a partnership for U.S. income tax purposes. As such, we were not viewed as a taxpaying entity in any jurisdiction and do not require a provision for income taxes. Each member of our company was responsible for the tax liability, if any, related to its proportionate share of our taxable income. Effective on February 16, 2021, we became treated as a corporation for U.S. income tax purposes and thus became subject to U.S. federal, state and local income taxes and are be taxed at the prevailing corporate tax rates. Among other things, we may begin to generate net operating losses at the corporate level. We will account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements but have not been reflected in taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value which based on our operating history Liquidity, Going Concern, and Capital Resources 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 and cash equivalents are comprised primarily of demand deposit accounts, money market funds and certificates of deposit. We believe our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. 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. 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 December 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. As described in our IPO prospectus, 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 provided by a related party, paid down a significant percentage of our accounts payable as of December 31, 2020, and eliminated all deferred compensation owed to a related party. 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. 28 The following table summarizes the statements of cash flows for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 % Change Net cash provided by (used in): Operating activities $ (1,992,381 ) $ (2,945,688 ) (32.4% ) Investing activities (870,264 ) (717,215 ) 21.3% Financing activities 2,690,328 3,681,435 (26.9% ) Change in cash, cash equivalents, restricted cash and restricted cash equivalents $ (172,317 ) $ 18,532 (1,029.8% ) Operating Activities Cash provided by operating activities for the year ended December 31, 2020 primarily consisted of payments received from our clients. 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 year ended December 31, 2020 consisted primarily of capitalization of software development expenses of $867,578. Financing Activities Cash flows from financing activities for the year ended December 31, 2020 decreased from the prior year period primarily due to reduced fund raising from the issuance of common and preferred stock and related third party debt. Contractual Obligations The following table summarizes our contractual obligations not on our Balance Sheet as of December 31, 2020 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 (1) $ 22,000 22,000 -0- -0- -0- (1) Represents minimum payments due for the lease of office space 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. 29 Critical Accounting Policies and Estimates Our financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these 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. Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are described below. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. Revenue Recognition The Company derives its revenues from two sources: (1) Platform fee revenues, which are comprised of subscription fees from customers accessing the Company’s cloud-based computing services and occasionally from customers paying a Development Fee; and (2) Advertising revenues based on impressions delivered via the Company’s Platform. Revenues are recognized when a contract with a customer exists, and the control of the promised services are transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those services. Substantially all of our revenues are generated from contracts with customers in the United States. We adopted ASC Topic 606, effective January 1, 2019, utilizing the modified retrospective method. This approach was applied to contracts that were not completed as of January 1, 2019, and the corresponding incremental costs of obtaining those contracts, which resulted an immaterial cumulative effect adjustment to the opening balance of accumulated deficit at date of adoption. The adoption of this ASU primarily impacted our disclosures pertaining to revenue from our contracts with customers. Reported results for fiscal year 2019 and the period ended December 31, 2020 reflect the application of ASC Topic 606, while the reported results for the fiscal year ended December 31, 2018 was not adjusted and continue to be reported under ASC Topic 605. 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 impaired and expensed during the period of such determination. Software development costs of $867,578 and $704,167 were capitalized in 2020 and 2019, respectively. Amortization of expense of capitalized software development costs were $368,332 and $684,044 for the years ended December 31, 2020 and 2019, respectively and are included in depreciation and amortization expense. Equity-based compensation Certain of our employees and consultants have received grants of common shares in our company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified. The common shares receive distributions if any in an order of priority in accordance with our limited liability company agreement. 30 Prior to our IPO in February 2021, we were a private company with no active public market for our common equity. Therefore, we have periodically determined the overall value of our company and the estimated per share fair value of our common equity at their various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of CPA’s Practice Aid. With the completion of our IPO, it will no longer be necessary for us to estimate the fair value of our common stock in connection with our accounting for equity awards we may grant, as the fair value of our common stock will be its public market trading price. For financial reporting purposes, we performed common stock valuations with the assistance of a third-party specialist, for the years ended December 31, 2019 and 2018. Our common stock valuations were prepared using a market approach based on the most recent round of equity financing using the Option Pricing Model.