AUDDIA INC. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page Auddia Inc. Annual Financial Statements Report of Independent Registered Public Accounting Firm 33 Balance Sheets at of December 31, 2020 and 2019 35 Statements of Operations, Years Ended December 31, 2020 and 2019 36 Statements of Changes in D eficiency in Shareholders’ Equity, Years Ended December 31, 2020, and 2019 37 Statements of Cash Flows, Years Ended December 31, 2020, and 2019 38 Notes to Financial Statements 39 32 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Auddia Inc. Boulder, Colorado Opinion on the Financial Statements We have audited the accompanying balance sheets of Auddia Inc. (f/k/a Clip Interactive, LLC.)(the “Company”) at December 31, 2020 and 2019, and the related statements of operations, deficiency in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Intangible Assets Impairment Assessments As described in Notes 1 to the financial statements, the Company has software development costs of approximately $1.8 million at December 31, 2020. No directly observable market inputs are available to measure the fair value to determine if the asset is recoverable. Therefore, an estimate is derived indirectly and is based on net present value techniques utilizing post-tax cash flows and discount rates. The estimates that management used in calculating the net present values depend on assumptions specific to the nature of the markets in which its product operates with regard to the amount and timing of projected future cash flows; long-term subscriber demand forecasts; actions of competitors (competing content), future tax and discount rates. 33 The principal considerations for our determination that performing procedures relating to the intangible assets impairment assessment is a critical audit matter are the significant judgment by management when developing the net present value of the intangible assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the amount and timing of projected future cash flows and the discount rate. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing management’s process for developing the fair value estimate; evaluating the appropriateness of the net present value techniques; testing the completeness and accuracy of underlying data used in the model; and evaluating the significant assumptions used by management, including the amount and timing of projected future cash flows and the discount rate. Evaluating management’s assumptions related to the amount and timing of projected future cash flows and the discount rate involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the intangible assets, the consistency with external market and industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ Daszkal Bolton LLP Daszkal Bolton LLP We have served as the Company’s auditor since 2020 Boca Raton, Florida March 31, 2021 34 Auddia Inc. Balance Sheets December 31, 2020 and 2019 December 31, 2020 2019 ASSETS Current assets: Cash $ 117,914 $ 290,231 Accounts receivable, net 128 16,488 Total current assets 118,042 306,719 Non-current assets: Property and equipment, net of accumulated depreciation of $687,123 and $683,090 12,289 13,637 Software development costs, net of accumulated amortization of $1,388,943 and $1,020,611 1,837,518 1,338,272 Deferred offering costs 338,419 196,511 Security deposits 5,500 5,500 Total non-current assets 2,193,726 1,553,920 Total assets $ 2,311,768 $ 1,860,639 LIABILITIES AND DEFICIENCY IN SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 1,553,284 $ 895,409 Line-of-credit 6,000,000 6,000,000 Convertible notes payable 2,146,775 1,742,174 Notes payable to related parties and deferred salary 1,628,197 1,433,995 Promissory Notes Payable 1,857,764 – PPP Loan 268,662 – Accrued fees to a related party 1,960,336 1,017,938 Total current liabilities 15,415,018 11,089,516 Commitments and contingencies Deficiency in shareholders' equity: Preferred stock - $0.001 par value, 10,000,000 authorized and 0 shares issued and outstanding – – Common stock - $0.001 par value, 100,000,000 authorized and 485,441 and 470,658 shares issued and outstanding at December 31, 2020 and December 31, 2019 486 471 Additional paid-in capital 38,256,584 38,122,486 Subscription receivable – (42,735 ) Accumulated deficit (51,360,320 ) (47,309,099 ) Total deficiency in shareholders’ equity (13,103,250 ) (9,228,877 ) Total liabilities and deficiency in shareholders’ equity $ 2,311,768 $ 1,860,639 See Accompanying Notes to Financial Statements. 35 Auddia Inc. Statement of Operations For the Years Ended December 31, 2020 and 2019 Year Ended December 31, 2020 2019 Revenue $ 110,924 $ 458,826 Operating expenses: Direct cost of services 645,573 1,011,401 Sales and marketing 78,811 132,460 Research and development 105,399 312,614 General and administrative 1,663,990 2,804,815 Total operating expenses 2,493,774 4,261,290 Loss from operations (2,382,850 ) (3,802,464 ) Other (expense) income: Interest expense (1,668,413 ) (1,427,901 ) Interest income 42 120 Total other expense (1,668,371 ) (1,427,781 ) Net loss $ (4,051,221 ) $ (5,230,245 ) Net loss per share attributable to common shareholders Basic and diluted $ (8.35 ) $ (11.78 ) Weighted average common shares outstanding Basic and diluted 485,441 444,160 See Accompanying Notes to Financial Statements. 36 Auddia Inc. Statement of Changes in Deficiency in Shareholders' Equity For the Years Ended December 31, 2020 and 2019 Common Stock Additional Paid-In Subscription Accumulated Shares Value Capital Receivable Deficit Total Balance, December 31, 2018 419,365 $ 419 $ 36,659,500 $ (326,268 ) $ (42,078,854 ) $ (5,745,203 ) Issuance of common shares for cash 43,629 44 904,398 – – 904,442 Collection of subscription receivable – – – 283,533 – 283,533 Issuance of common shares for consulting services 7,664 8 146,765 – – 146,773 Share-based compensation – – 411,823 – – 411,823 Net loss – – – – (5,230,245 ) (5,230,245 ) Balance, December 31, 2019 470,658 471 38,122,486 (42,735 ) (47,309,099 ) (9,228,877 ) Issuance of common shares 14,783 15 64,257 – – 64,272 Collection of subscription receivable – – – 42,735 – 42,735 Share-based compensation – – 69,841 – – 69,841 Net loss – – – – (4,051,221 ) (4,051,221 ) Balance, December 31, 2020 485,441 $ 486 $ 38,256,584 $ – $ (51,360,320 ) $ (13,103,250 ) See Accompanying Notes to Financial Statements. 37 Auddia Inc. Statement of Cash Flows For the Years Ended December 31, 2020 and 2019 Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ (4,051,221 ) $ (5,230,245 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 372,366 690,542 Share-based compensation 69,841 411,823 Issuance of common stock for consulting services – 146,773 Issuance of related party debt for consulting services – 486,198 Change in assets and liabilities: Accounts receivable 16,361 86,026 Accrued fees to a related party 942,398 142,399 Accounts payable and accrued liabilities 657,874 320,796 Net cash used in operating activities (1,992,381 ) (2,945,688 ) Cash flows from investing activities: Software capitalization (867,578 ) (704,167 ) Purchase of property and equipment (2,686 ) (13,048 ) Net cash used in investing activities (870,264 ) (717,215 ) Cash flows from financing activities: Proceeds from related party debt 539,499 1,005,000 Repayments of related party debt (345,297 ) (57,203 ) Proceeds from issuance of common stock 107,007 1,187,975 Proceeds from issuance of PPP Loan 268,662 – Proceeds from issuance of convertible and related party notes payable 2,262,365 1,742,174 Deferred offering costs capitalized (141,908 ) (196,511 ) Net cash provided by financing activities 2,690,328 3,681,435 Net (decrease) increase in cash (172,317 ) 18,532 Cash, beginning of year 290,231 271,699 Cash, end of year $ 117,914 $ 290,231 Supplemental disclosures of cash flow information: Cash paid for interest $ 1,337,140 $ 323,250 Supplemental disclosures of non-cash activity: Conversion of notes to convertible notes $ – $ 250,000 Conversion of accounts payable to convertible notes $ – $ 17,197 See Accompanying Notes to Financial Statements. 38 Auddia Inc. Notes to Financial Statements For the Year Ended December 31, 2020 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. Effective February 16, 2021, the Company converted from Clip Interactive, LLC, a Colorado limited liability company to Auddia Inc., 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”). 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. Risks and Uncertainties The Company is subject to various risks and uncertainties frequently encountered by companies in the early stages of development. Such risks and uncertainties include, but are not limited to, its limited operating history, competition from other companies, limited access to additional funds, dependence on key personnel, and management of potential rapid growth. To address these risks, the Company must, among other things, develop its customer base; implement and successfully execute its business and marketing strategy; develop follow-on products; provide superior customer service; and attract, retain, and motivate qualified personnel. There can be no guarantee that the Company will be successful in addressing these or other such risks. Cash The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2020 or December 31, 2019. 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 December 31, 2020 and December 31, 2019, the Company had approximately $0 and $47,000, 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. 39 Accounts Receivable The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. The allowance for doubtful accounts was $0 at December 31, 2020 and $2,500 at December 31, 2019. Credit Risk, Major Customers, and Suppliers Revenues are predominately in the radio industry located primarily in the United States. The Company extends trade credit to its customers on terms that are generally practiced in the industry. Two customers accounted for approximately 72% and 82% of revenues for the year ended December 31, 2020 and 2019, respectively. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight line method over the estimated useful lives for owned assets, ranging from two to five years. 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 approximately $867,600 and $704,200 were capitalized for the years ended December 31, 2020 and 2019, respectively. Amortization of capitalized software development costs were approximately $368,300 and $684,000 for the years ended December 31, 2020 and 2019, respectively and are included in depreciation and amortization expense. Offering Costs The Company deferred direct and incremental costs associated with its IPO that occurred in February 2021. During the years ended December 31, 2020 and December 31, 2019 offering costs in the amounts of $50,284 and $196,511 were capitalized, consisting principally of legal, advisory, and consulting fees incurred in connection with the formation and preparation for the IPO. Long-Lived Assets The Company reviews its tangible and limited lived intangible long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. If a potential impairment is indicated, the Company compares the carrying amount of the asset to the undiscounted future cash flows associated with the asset. In the event the future cash flows are less than their carrying value, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The Company determined long-lived assets were not impaired at December 31, 2020 and December 31, 2019. 40 Income Taxes Prior to the Company’s conversion to a Delaware corporation in February 2021, the Company was a limited liability company and had elected to be treated as a pass-through entity for income tax purposes. Accordingly, taxable income and losses of the Company were reported on the income tax returns of its members, and no provision for federal income taxes have been recorded in the accompanying financial statements. Had the Company been a taxable entity, no provision for income taxes would have been recorded as the Company has sustained losses since inception The Company may only recognize tax benefits from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company is required to make many subjective assumptions and judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to its subjective assumptions and judgments. ASC Topic 606, "Revenue from Contracts with Customers" On January 1, 2019, the Company adopted ASC 606 using the modified retrospective method. This method required retrospective application of the new accounting standard to all unfulfilled contracts that were outstanding as of January 1, 2019. Revenue Recognition 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 revenues are generated from contracts with customers in the United States. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense for the year ended December 31, 2020 and 2019, were not significant. Share-Based Compensation 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. 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. Net Loss per Share Basic loss per share common share is calculated based on the weighted-average number of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share . Diluted net (loss) income per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. Potential common shares are composed of shares of common issuable upon the exercise of options and warrants. Geographic Locations & Segments For the year ended December 31, 2020 and 2019, 100% of revenue attributable to customers and 100% of our net assets are located within the United States. 41 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. Liquidity, Capital Resources and Going Concern At December 31, 2019, the Company had liabilities in excess of assets in the amount of approximately $9.2 million. During 2020, the Company received approximately $2.7 million from the proceeds from the issuance of indebtedness, but sustained a net loss of approximately $4.1 million and had consumed cash in operating activities of approximately $2.0 million during the year. Prior to the IPO, the Company has satisfied its capital needs with the net proceeds from its sales of equity securities, the issuance of convertible debt and bank debt. Company management expects to continue to incur net losses and have significant cash outflows for at least the next 12 months. Subsequent to December 31, 2020, the Company completed its IPO and received proceeds of approximately $15.2 million from the sale of its securities and extinguished approximately $4.6 million of indebtedness via the conversion of convertible and related party debt to shares of Common Stock (see Note 11). These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. Based on this analysis the Company concluded it has the ability to continue as a going concern for at least the next 12 months. 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. 42 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 are not recognized as revenue but instead was recorded in a deferred contract liability until the customer’s services were satisfied. Under the Company’s current outstanding contracts such services have been minimal and are not expected to be a significant performance obligation under its existing contracts in the future. 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 are 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 is recognized over time as the customer simultaneously receives and consumes the benefits provided by the Company’s platform services. Advertising Revenue The Company legacy contracts generated advertising revenue in two distinctive forms: one which can be from third party advertisers that place ads on the Company’s mobile apps and web players which are separate customer contracts whereby such advertising access is the only service and performance obligation within those contracts, and second is 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 are comprised of local and national interactive spots that are sourced and managed by customers or by third party service providers (such as Google), whereby the Company receives 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 discontinue revenue sharing agreements with our clients for advertising sourced by the client. Revenue is recognized as performance obligations are satisfied on a net basis as the Company is acting as an agent, which generally occurs as ads are delivered through the platform. We generally recognize revenue based on delivery information from the external providers campaign trafficking systems. The internal advertising revenues are comprised of advertising fees for local and national interactive spot and local or digital only advertising campaign fees that are managed by the Company. For these advertising spots, the Company retains all the money spent on the advertising campaigns run on the Company’s interactive platform. Revenue is recognized as performance obligations are satisfied, which generally occurs as ads are delivered through the platform. For Interactive and Digital Campaign and Spot Ad Fees which may include customer digital and interactive spot ad campaigns, interactive spot campaigns, the revenue is recognized at a point in time under the “as-invoiced” practical expedient, since customer usage driven variability is not required to be estimated but rather is allocated to the distinct time period in which the variable activity occurs. Certain customers may receive platform fee credits or advertising discounts, which are considered as variable consideration in the determination of the transaction price. These performance obligations related to the fixed price arrangements is discounted ratably based on their relative standalone selling prices. 43 Contract Assets and Liabilities The Company had no contract assets or contract liabilities at December 31, 2020 or December 31, 2019 as the Company does not receive payments in advance and is generally entitled to bill for monthly services as they are provided under its existing customer contracts. Practical Expedients and Exemptions We generally expense sales commissions when incurred because the duration of the contracts for which we pay commissions are less than one year. These costs are 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: Year Ended December 31, 2020 2019 Revenues Platform Service Fees (hosting services, support, data analytics) $ 85,800 $ 249,775 Digital advertising served by 3 rd parties – 194,401 Digital advertising served by Clip Interactive 25,124 14,650 $ 110,924 $ 458,826 Note 3 – Balance Sheet Disclosures Accounts payable and accrued liabilities consist of the following: December 31, 2020 December 31, 2019 Accounts payable $ 1,111,621 $ 771,992 Credit cards payable 22,885 25,562 Accrued interest 364,856 97,855 Wages payable 53,922 – $ 1,553,284 $ 895,409 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 on July 10, 2019. The available principal balance under the line of credit is $6,000,000, and the outstanding balance accrues interest at a variable rate based on the bank’s prime rate plus 1% (3.75% at December 31, 2020 and 5.75% at December 31, 2019) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2021. The Company maintains a minimum balance at the lender to cover two months of interest payments. The line of credit is collateralized by all assets of the Company as well as certain cash assets of two shareholders in control accounts at the lender. One control account has a balance of $2,000,000 and the other control account has a balance of $4,000,000. The shareholder with the $2,000,000 control account has a collateral agreement with the Company which is described in Note 6. The shareholder with the $4,000,000 control account at the lender personally guarantees the full amount of the loan. The outstanding balance on the line-of-credit at December 31, 2020 and December 31, 2019 was $6,000,000. As described in Note 11, as a result of the IPO, the balance on the line of credit was reduced by $4.0 million to make the outstanding balance $2.0 million. 44 Note 5 – 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 $2,146,775. These convertible notes accrue interest at 6.0% per year and were scheduled to mature on December 31, 2021. In the event of an IPO being completed, the Notes automatically convert into Common Stock at discounts ranging from 50% to 75% of the IPO price. As described in Note 11, all the convertible notes converted into shares of common stock in February 2021 upon the completion of the IPO. Note 6 – Notes Payable and Accrued Fees to Related Parties 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, with $942,397 being recorded as interest expense for the twelve months ended December 31, 2020. The balance outstanding on the accrued collateral fees was $1,960,336 at December 31, 2020, excluding the $725,000 unsecured note payable. The collateral agreement automatically renews annually on April 13. As described in Note 11, the notes payable and accrued interest due to this shareholder converted to shares of common stock in February 2021 due to the IPO. 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 2021. As discussed above in Accrued Fees to a Related Party, i n 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. 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 of principal at December 31, 2020 was $271,759. 45 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. As described in Note 11, all the Promissory Notes converted into common shares in February 2021 due to the completed IPO. Cares Act Paycheck Protection Program Loan In April 2020, the Company entered into a promissory note evidencing an unsecured loan (the “Loan”) in the amount of $268,662 made to the Company under the Paycheck Protection Program (the “PPP”). The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration. The promissory note matures in April 2022 and bears 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. The Loan 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 Note contains 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 promissory note. 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 Loan, 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 Loan 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 $72,999 and $144,853 for the year ended December 31, 2020 and 2019, 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 are currently searching for a new principal office and believe that suitable space, at commercially reasonable terms, is readily available to accommodate the current and future needs of our operations. 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 has a commitment to pay annual collateral fees as described in Note 6. 46 Note 8 - Share-based Compensation Stock Options The following table presents the activity for stock options outstanding: Weighted Non-Qualified Average Options Exercise Price Outstanding - December 31, 2019 302,578 $ 3.21 Granted – – Forfeited/canceled (2,225 ) $ 3.21 Exercised – – Outstanding - December 31, 2020 300,353 $ 3.21 The following table presents the composition of options outstanding and exercisable: Options Outstanding Options Exercisable Exercise Prices Number Price* Life* Number Price* $2.70 68,518 $2.70 3.45 124,786 $2.70 $2.90 56,236 $2.89 6.75 17,782 $2.89 $4.26 175,599 $4.25 8.87 139,933 $4.25 Total - December 31, 2020 300,353 $3.65 7.28 282,501 $3.48 ________________________ * 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: Weighted Warrants Average Outstanding Exercise Price Outstanding - December 31, 2019 341,918 $7.02 Granted 14,341 $14.68 Forfeited/cancelled/restored 2,075 $9.13 Exercised – – Outstanding - December 31, 2020 358,334 $7.02 All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 2.75 years as of December 31, 2020. 47 Note 9 – Deficiency in Shareholders’ Equity On February 17, 2021, the Company converted its LLC membership equity units into 485,441 shares of Common Stock with a $0.001 par value. The conversion has been given retrospective treatment. As a result, the Company has reflected 419, 365 shares of Common Stock outstanding at December 31, 2018. During 2019, the Company issued 43,629 shares of common stock for cash, and 7,664 shares of common stock for services valued at $146,773. During 2020, the Company issued 14,783 shares of common stock for cash. Note 10 – 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. December 31, 2020 and 2019, 58,828 and 44,178, 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 11 – Subsequent Events The Company has evaluated all subsequent events after December 31, 2020, and there were no material subsequent events requiring disclosure, except the following. In January 2021, the Company applied for and received a second loan of $267,000 the under the Paycheck Protection Program (the “PPP”) on the same terms as the first PPP Loan. The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration. In January 2021, a majority of the holders of all of the Company’s debt securities, including its Convertible Debt, Promissory Notes, Notes and Accrued Fees Payable to Related Parties agreed to extend the maturity date of the approximately $7.3 million of debt securities, which were in technical default, from December 31, 2020 to December 31, 2021. In February 2021, the Company 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 in common shares. In conjunction with the Company’s conversion from a limited liability company to a corporation in February 2021, all of the Company’s then outstanding LLC membership units were converted into shares of common stock. Concurrently with the IPO, holders of the Company’s promissory notes, convertible notes, and related party notes, along with accrued interest, were converted into approximately 6.8 million shares of the Company’s common stock, with beneficial conversion rates charged to interest expense upon conversion. 48 Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None.