AUDDIA INC. 10-Q

Item 1. Financial Statements Auddia Inc. Condensed Balance Sheets As of September 30, 2021 (Unaudited) December 31, 2020 ASSETS Current assets: Cash $ 8,081,983 $ 117,914 Accounts receivable, net – 128 Total current assets 8,081,983 118,042 Non-current assets: Property and equipment, net of accumulated depreciation of $ 697,550 and $ 687,123 64,331 12,289 Software development costs, net of accumulated amortization of $ 1,462,312 and $ 1,388,943 2,669,106 1,837,518 Deferred offering costs – 338,419 Prepaids and other non-current assets 129,424 5,500 Total non-current assets 2,862,861 2,193,726 Total assets $ 10,944,844 $ 2,311,768 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities $ 357,715 $ 1,553,284 Line of credit – 6,000,000 Convertible notes payable – 2,146,775 Notes payable to related parties and deferred salary – 1,628,197 Promissory notes payable – 1,857,764 PPP loan 267,482 268,662 Accrued fees to a related party – 1,960,336 Total current liabilities 625,197 15,415,018 Commitments and contingencies – – Stockholders' equity (deficit): Preferred stock - $ 0.001 par value, 10,000,000 authorized and 0 shares issued and outstanding at September 30, 2021 and December 31, 2020 – – Common stock - $ 0.001 par value, 100,000,000 authorized and 12,414,638 and 485,441 shares issued and outstanding at September 30, 2021 and December 31, 2020 12,415 486 Additional paid-in capital 73,766,973 38,256,584 Accumulated deficit ( 63,459,741 ) ( 51,360,320 ) Total stockholders’ equity (deficit) 10,319,647 ( 13,103,250 ) Total liabilities and stockholders’ equity (deficit) $ 10,944,844 $ 2,311,768 The accompanying notes are an integral part of these unaudited condensed financial statements. 1 Auddia Inc. Condensed Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue $ – $ 1,040 $ – $ 110,919 Operating expenses: Direct cost of services 36,501 42,379 152,532 361,181 Sales and marketing 209,207 76,459 472,322 260,658 Research and development 119,321 90,965 261,977 233,403 General and administrative 1,687,099 277,105 3,036,474 1,355,531 Total operating expenses 2,052,128 486,908 3,923,305 2,210,773 Loss from operations ( 2,052,128 ) ( 485,868 ) ( 3,923,305 ) ( 2,099,854 ) Other income (expense): Finance charge – convertible debt – – ( 8,141,424 ) – PPP loan extinguishment – – 268,662 – Interest expense 2,720 ( 441,321 ) ( 306,555 ) ( 1,379,735 ) Interest income 5 2 3,201 41 Total other income (expense) 2,725 ( 441,319 ) ( 8,176,116 ) ( 1,379,694 ) Net loss before income taxes ( 2,049,403 ) ( 927,187 ) ( 12,099,421 ) ( 3,479,548 ) Income taxes – – – – Net loss $ ( 2,049,403 ) $ ( 927,187 ) $ ( 12,099,421 ) $ ( 3,479,548 ) Net loss per share attributable to common stockholders Basic and diluted $ ( 0.17 ) $ ( 1.91 ) $ ( 1.25 ) $ ( 7.25 ) Weighted average common shares outstanding Basic and diluted 12,376,987 485,441 9,717,915 480,100 The accompanying notes are an integral part of these unaudited condensed financial statements. 2 Auddia Inc. Condensed Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) Nine Months Ended September 30, 2021 Common Stock Additional Paid-In Accumulated Shares Value Capital Deficit Total Balance, December 31, 2020 485,441 $ 486 $ 38,256,584 – $ ( 51,360,320 ) $ ( 13,103,250 ) Issuance of common shares 4,021,818 4,022 14,603,768 – – 14,607,790 Exercise of warrants 1,092,809 1,093 4,952,459 4,953,552 Conversion of debt obligations 6,814,570 6,814 15,186,619 – 15,193,433 Share-based compensation – – 767,543 – 767,543 Net loss – – – ( 12,099,421 ) ( 12,099,421 ) Balance, September 30, 2021 12,414,638 $ 12,415 $ 73,766,973 – $ ( 63,459,741 ) $ 10,319,647 Nine Months Ended September 30, 2020 Common Stock Additional Paid-In Subscription Accumulated Shares Value Capital Receivable Deficit Total 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 Exercise of warrants – Conversion of debt obligations – Collection of subscription receivable – – – 42,735 – 42,735 Share-based compensation – – 52,579 – – 52,579 Net loss – – – – ( 3,479,548 ) ( 3,479,548 ) Balance, September 30, 2020 485,441 $ 486 $ 38,239,322 $ – $ ( 50,788,647 ) $ ( 12,548,839 ) The accompanying notes are an integral part of these unaudited condensed financial statements. 3 Auddia Inc. Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 12,099,421 ) $ ( 3,479,548 ) Adjustments to reconcile net loss to net cash used in operating activities: Finance charge associated with debt to equity conversion 8,141,424 – Depreciation and amortization 83,794 371,358 Bad debt provision – ( 2,500 ) Share-based compensation 767,543 52,579 Gain on PPP loan extinguishment ( 268,662 ) – Issuance of common stock for consulting services – 64,272 Change in assets and liabilities: Accounts receivable 128 18,839 Prepaids and other non-current assets ( 123,924 ) – Accounts payable and accrued liabilities ( 820,996 ) 1,373,892 Net cash used in operating activities ( 4,320,114 ) ( 1,601,108 ) Cash flows from investing activities: Software capitalization ( 904,957 ) ( 543,835 ) Purchase of property and equipment ( 62,468 ) ( 2,686 ) Net cash used in investing activities ( 967,425 ) ( 546,521 ) Cash flows from financing activities: Proceeds from issuance of common shares 19,899,762 – Repayments of related party debt and deferred salary ( 930,636 ) ( 257,797 ) Repayments of line of credit ( 6,000,000 ) – Proceeds from issuance of PPP loan 267,482 268,662 Proceeds from issuance of promissory notes payable 15,000 – Deferred offering costs capitalized – ( 91,624 ) Proceeds from issuance of convertible notes payable – 1,467,841 Proceeds from related party debt – 490,539 Subscription receivable – 42,735 Net cash provided by financing activities 13,251,608 1,920,356 Net increase (decrease) in cash 7,964,069 ( 227,273 ) Cash, beginning of period 117,914 290,231 Cash, end of period $ 8,081,983 $ 62,958 Supplemental disclosures of cash flow information: Cash paid for interest $ ( 66,412 ) $ ( 1,379,046 ) Cash paid for income taxes $ – $ – Supplemental disclosures of non-cash activity: Shares issued for conversion of indebtedness $ 15,193,433 $ – PPP loan extinguishment $ ( 268,662 ) $ – The accompanying notes are an integral part of these unaudited condensed financial statements. 4 Auddia Inc. Notes to Condensed Financial Statements (Unaudited) Note 1 - Description of Business, Basis of Presentation and Summary of Significant Accounting Policies Description of Business Auddia Inc., formerly Clip Interactive, LLC, (the “Company”, “Auddia”, “we”, “our”) is a technology company that is reinventing how consumers engage with audio through the development of a proprietary AI platform for audio and innovative technologies for podcasts. Clip Interactive, LLC was initially formed as a Colorado limited liability company on January 14, 2012 and on November 25, 2019 changed its trade name to Auddia. On February 16, 2021, the Company completed an initial public offering (the “IPO”) of 3,991,818 units, at $4.125 per unit, consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.54 per share. In addition, the underwriters exercised their option to purchase 598,772 Series A warrants to cover over-allotments and were issued 319,346 in representative warrants at an exercise price of $5.15625 per share. After deducting underwriters commissions and expenses, the Company received net proceeds of approximately $15.1 million and its common stock commenced trading on Nasdaq under the ticker symbol “AUUD”. Concurrently with the IPO, holders of the Company’s promissory notes, convertible notes, and related party notes, along with accrued interest, were converted into 6,814,570 shares of the Company’s common stock. Concurrently with the IPO the Company converted from a Colorado limited liability company to a Delaware corporation. This accounting change has been given retrospective treatment in the condensed financial statements. Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Unaudited interim financial information The condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K. The results for any interim period are not necessarily indicative of results for any future period. Use of Estimates The preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The condensed financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to valuation of capital stock, warrants and options to purchase shares of the Company's common stock, and the estimated recoverability and amortization period for capitalized software development costs. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. 5 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 September 30, 2021 or December 31, 2020. The Company maintains cash deposits at several financial institutions, which are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s cash balance may at times exceed these limits. At September 30, 2021 and December 31, 2020, the Company had approximately $7.8 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 previously capitalized certain legal, professional accounting and other third-party fees that were directly associated with in-process stock financings as deferred offering costs until such financings were consummated. After consummation of the Company’s IPO, 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. 6 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 provided 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 included 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 presented 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 on a 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. 7 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 no longer provides these services. 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 did 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 had the right to invoice for services performed. 8 The following table presents revenues disaggregated by revenue source: Disaggregated revenue table Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenues: Platform Service Fees (hosting services, support, data analytics) $ – $ – $ – $ 85,800 Digital advertising served by 3 rd parties – 1,040 – 25,119 $ – $ 1,040 $ – $ 110,919 Note 3 – Balance Sheet Disclosures Accounts payable and accrued liabilities consist of the following: Schedule of accounts payable and accrued liabilities September 30, 2021 December 31, 2020 Accounts payable and accrued expenses $ 349,662 $ 1,111,621 Credit cards payable 8,053 22,885 Accrued interest – 364,856 Wages payable – 53,922 Accounts payable and accrued liabilities $ 357,715 $ 1,553,284 Note 4 – Line of Credit On April 10, 2018 the Company refinanced its previous line-of-credit with a different bank and this agreement was amended in July 2019 and March 2021. The principal balance was paid off in full as of July 8, 2021. Interest accrued at a variable rate based on the bank’s prime rate plus 1% (4.25% at December 31, 2020) but at no time less than 4.0%. Monthly interest payments were required, with any outstanding principal due on July 10, 2021. Interest expense for the three months ended September 30, 2021 and 2020 was ($2,720) and $65,855, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $66,412 and $212,522, respectively. The line of credit was collateralized by all assets of the Company, including $2 million of cash held in a control account at the lender. The Company also maintained a minimum balance at the lender to cover two months of interest payments. Prior to our IPO, the line of credit was collateralized by $6,000,000 of cash assets of two shareholders held in control accounts at the lender. Following the Company’s IPO in February 2021 the line of credit was amended and the Company paid down the outstanding principal balance on its bank line of credit from $6 million to $2 million and the available principal balance for the line of credit was reduced from $6 million to $2 million. Further, the $6 million of cash collateral previously provided by the two shareholders was released. The remaining principal balance of $2 million was paid off in full and the line of credit was terminated as of July 8, 2021. The outstanding balance on the line of credit at September 30, 2021 and December 31, 2020 was $0 and $6,000,000, respectively. 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 was terminated in March 2021. 9 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. Interest expense for the three months ended September 30, 2021 and 2020 was $0 and $32,466, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $16,586 and $96,207, respectively. Accrued fees to a related party The Company had an agreement with a shareholder to provide collateral for a bank line of credit described in Note 4 – Line of Credit. The amount of the cash collateral provided by the shareholder to the bank was $2.0 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 bore interest at 33% annually and had a maturity date of December 31, 2021. The fees that accrued on the collateral arrangement were 33% percent of the collateral amount annually plus an annual renewal fee of $50,000. Interest expense for the three months ended September 30, 2021 and 2020 was $0 and $326,359, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $208,727 and $981,534, 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 were 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 were scheduled to 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. Interest expense for the three months ended September 30, 2021 and 2020 was $0 and $15,965, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $14,454 and $23,091, respectively. In conjunction with the February 2021 IPO, all of 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 nine months ended September 30, 2021. 10 Note 6 – Notes Payable Notes payable to related parties and deferred salary An executive officer of the Company agreed to defer receipt of compensation to preserve liquidity in the Company. The accumulated amount of compensation owed to this executive officer was approximately $631,000 at December 31, 2020. The Company paid this deferred compensation in the first quarter of 2021. During 2019, 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 was due upon maturity, of which the amount relating to 2019 of $75,000 was 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 was 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 was maximized at $165,000 after month five. The outstanding balance was repaid in February 2021. Cares Act Paycheck Protection Program loan In April 2020, 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 was set to mature 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 was required to make 18 monthly payments of principal and interest in the amount of $14,370 related to the First Loan. The PPP Loans may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from the Loans may only be used for payroll costs (including benefits), interest on mortgage obligations, rent, utilities and interest on certain other debt obligations. The PPP Loans 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. 11 Pursuant to the terms of the CARES Act and the PPP, the Company applied for forgiveness for the First Loan. On June 15, 2021, the Company received confirmation that the First Loan was approved for forgiveness and the Company recorded $268,662 in PPP loan extinguishment to other income during the nine months ended September 30, 2021. The Company has applied to the lender for forgiveness for the amount due on the Second Loan and as noted in Note 10, the Company received confirmation of full forgiveness in November 2021. 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 Second Loan to be forgiven, no assurance can be given that the Company will obtain forgiveness of the Second Loan in whole or in part. Note 7 – Commitments and Contingencies Operating Lease In April 2021, the Company entered into a lease agreement for a new primary office space in Boulder, Colorado comprising of 8,639 square feet. The lease commenced on May 15, 2021 and terminates after 12 months. The lease has an initial base rent of $7,150 per month, with the first 15 days rent free and includes three separate six month renewal options, subject to fixed rate escalation increases. The Company previously leased approximately 3,000 square feet of office space that expired on April 30, 2021. Rent expense was as follows: Schedule of rent expense Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Rent expense $ 22,397 $ 18,231 $ 53,887 $ 54,465 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. Note 8 - Share-based Issuances Stock Options The following table presents the activity for stock options outstanding: Schedule of stock option activity Weighted Average Options Exercise Price Outstanding - December 31, 2020 300,353 $ 3.65 Granted 1,235,500 2.79 Forfeited/canceled (21,365 ) $ 2.96 Exercised – – Outstanding – September 30, 2021 1,514,488 $ 2.96 12 The following table presents the composition of options outstanding and exercisable: Options outstanding and exercisable Options Outstanding Options Exercisable Exercise Prices Number Price* Life* Number Price* $2.70 68,518 $2.70 2.07 68,518 $2.70 $2.90 54,941 $2.89 6.29 54,941 $2.89 $4.26 173,243 $4.25 7.88 141,011 $4.25 $2.79 1,217,786 $2.79 9.87 252,621 $2.79 Total - September 30, 2021 1,514,488 $2.96 9.16 517,091 $3.19 ________________________ * Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively. During the three and nine months ended September 30, 2021, the Company granted 1,235,500 stock options to certain executives and key employees. Under the terms of the option agreements, the options are subject to certain vesting requirements. Restricted Stock Units The following table presents the activity for restricted stock units outstanding: Schedule of restricted stock units activity Weighted Restricted Average Stock Units Exercise Price Outstanding - December 31, 2020 – $ – Granted 424,500 – Forfeited/canceled – $ – Exercised – – Outstanding – September 30, 2021 424,500 $ – During the three and nine months ended September 30, 2021, the Company granted 424,500 restricted stock units. Under terms of the restricted stock agreements, the restricted stock units are subject to a certain vesting schedule. The Company recognized share-based compensation expense related to stock options and restricted stock units of $735,592 and $767,543 for the three and nine months ended September 30, 2021, respectively. The remaining unvested share-based compensation expense of $2,844,328 is expected to be recognized over the next 46 months. 13 Warrants The following table presents the activity for warrants outstanding: Schedule of warrants activity Weighted Warrants Average Outstanding Exercise Price Outstanding - December 31, 2020 358,334 $ 7.02 Granted 4,909,936 $ 4.58 Forfeited/cancelled/restored – – Exercised (1,093,180 ) 4.53 Outstanding – September 30, 2021 4,175,090 $ 4.80 In connection with the February 2021 IPO, the Company issued 3,991,818 warrants to purchase shares of common stock and issued to 598,772 warrants to its underwriters to cover over-allotments. The Company also issued 319,346 of representative warrants to its underwriters to purchase shares of common stock and these representative warrants contain a cashless exercise feature. During the three months ended September 30, 2021 certain holders of our publicly traded Series A Warrants exercised 1,091,692 warrants for 1,091,692 million shares of common stock at the cash exercise price of $ 4.5375 per share. In addition, certain holders of our Pre-IPO warrants exercised 1,489 warrants for 1,117 shares of common stock at the net exercise price of $ 0.87 per share. All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 4.19 years as of September 30, 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 September 30, 2021 and 2020, 4,632,777 shares and 654,141 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 November 2021, the Company received confirmation from the SBA that the Second Loan was approved for forgiveness and recorded $267,482 in PPP loan extinguishment to other income. 14