AUDDIA INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 31, 2021. This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report. You should carefully read the “Risk Factors” section of this Quarterly Report and of our Annual Report on Form 10-K for the year ended December 31, 2020 to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.” Overview We are a technology company that is reinventing how consumers engage with audio through the development of a proprietary AI platform for audio and innovative technologies for podcasts. We are leveraging these technologies to bring to market two industry first Apps, Auddia and Vodacast. The Auddia app gives consumers the opportunity to listen to any AM/FM radio station with no commercials while personalizing the listening experience through skips, the insertion of on-demand content and the programming of audio routines to customize listening sessions such as a daily commute. The Auddia App represents the first-time consumers can access the local content uniquely provided by radio in the commercial free and personalized manner many consumers have come to demand for media consumption. We are leveraging our legacy business to bring to market a premium AM/FM radio listening experience through the Auddia App. The Auddia App is intended to be downloaded by consumers who will pay a subscription fee in order to listen to any streaming AM/FM radio station without commercials. Advanced features will allow consumers to skip any content heard on the station, request audio content on-demand, and program an audio routine. We believe the Auddia App represents a significant differentiated audio streaming product that will be the first to come to market since the emergence of popular streaming music apps such as Pandora, Spotify, Apple Music, Amazon Music, etc. We believe that the most significant point of differentiation is that in addition to music, the Auddia App is intended to deliver non-music content that includes local sports, news, weather, traffic and the discovery of new music. Radio is the dominant audio platform for local content and new music discovery. We launched the Auddia App and initiated our first consumer trial in July 2021 in a single market in southern Virginia and northern North Carolina. We will continue with additional consumer trials in Santa Rosa, CA and Montgomery and Sylacauga, Alabama during the fourth quarter of 2021 to measure consumer interest and engagement with the Auddia App. We are continuing to advance the training of our proprietary AI technology and once complete we are anticipating nationally launching all stations. The Auddia mobile App is available today through the iOS and Android App stores. We also have developed a podcasting platform called Vodacast. Vodacast provides a unique suite of tools that helps Podcasters create additional digital content for their podcast episodes as well as plan their episodes, build their brand around their Podcast and monetize their content with new monetization channels. One innovative and proprietary part of the Vodacast platform is the availability of tools to create and distribute an interactive digital feed which supplements podcast episode audio with additional digital. These content feeds allow podcasters to tell deeper stories to their listeners while giving podcasters access to digital revenue for the first time. Podcasters will be able to build these interactive feeds using The Vodacast Hub, a content management system that also serves as a tool to plan and manage podcast episodes. The digital feed activates a new digital ad channel that turns every audio ad into a direct-response digital ad, increasing the effectiveness and value of their established audio ad model. The feed also presents a richer listening experience, as any element of a podcast episode can be supplemented with images, videos, text and web links. This feed appears fully synchronized in the Vodacast mobile App, and it also can be hosted and accessed independently (e.g., through any browser), making the content feed universally distributable. 15 Vodacast will also introduce a unique and industry first multi-channel, highly flexible set of revenue channels that podcasters can activate in combination to allow listeners to choose how they want to consume and pay for content. “Flex Revenue” allows podcasters to continue to run their standard audio ad model and complement those ads with direct response enabled digital ads in each episode content feed, increasing the value of advertising on any podcast. “Flex Revenue” will also activate subscriptions, on-demand fees for content (e.g., listen without audio ads for a micro payment fee) and direct donations from listeners. Using these channels in combination, podcasters can maximize revenue generation and exercise higher margin monetization models, beyond basic audio advertising. These revenue channels are expected to be available to Podcasters starting late 2021 and into 2022. The Vodacast mobile App is available today through the iOS and Android App stores. We have initiated efforts to recruit podcast hosts to Vodacast to onboard their podcast, create digital feeds, and encourage their listening audience to download and listen through the Vodacast App. We expect to continue to attract podcasts and their listening audience to Vodacast through paid promotion through the fourth quarter 2021 and into 2022. We have funded our operations with proceeds from the February 2021 IPO and Series A warrants exercise in July 2021. Since inception we have incurred significant operating losses. As of September 30, 2021, we had an accumulated deficit of $63.5 million. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and commercialization of one or more of our Apps. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we: · continue consumer trials of our Auddia App and as we continue training our proprietary AI technology; · continue to develop and expand our technology and functionality to advance the Auddia and Vodacast Apps; · rollout our product on a national basis, which will include increasing our sales and marketing costs related to the promotion of our products. Auddia promotion will include a combination of a) purchasing ads directly from broadcasters or b) participating broadcasters to promote without purchasing ads, but sharing a portion of subscription proceeds based on listening activity on those stations; · hire additional business development, product management, operational and marketing personnel; · continue market studies of our products; · add operational and general administrative personnel which will support our product development programs, commercialization efforts and our transition to operating as a public company. As a result, we may need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. 16 As of September 30, 2021, we had cash, cash equivalents and investments of $8.1 million, which we believe will fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and capital resources.” To finance our operations beyond that point, we will need to raise additional capital, which cannot be assured. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our Apps or other research and development initiatives. Components of our results of operations Operating expenses Direct costs of services Direct cost of services consists primarily of costs incurred related to our technology and development of our Apps, including hosting and other technology related expenses. Historically, we had higher direct costs of services related to our legacy platform, however, since the termination of our legacy services and platform in August 2020, these costs have been reduced. We expect our direct costs of services to increase in the future as we continue to develop and enhance our technology related to the Auddia and Vodacast Apps. Research and development Since our inception, we have focused significant resources on our research and development activities related to the software development of our technology. We account for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose is probable. We cease capitalization of development costs once the software has been substantially completed and is available for its intended use. Software development costs are amortized over a useful life estimated by the Company’s management of three years. Costs associated with significant upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies. Unamortized capitalized software development costs determined to be in excess of anticipated future net revenues are impaired and expensed during the period of such determination. We expect to continue to incur substantial research and development expenses and capitalization in the future as we continue to develop our Auddia and Vodacast Apps. Sales and marketing Our sales and marketing expenses consist primarily of salaries and consulting services, related to the sales, promotion and commercial trials related to our products. We expect our sales and marketing expenses to continue to increase as we look to commercialize and generate revenue for our products to attract and retain users. General and administrative Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and professional fees related to auditing, tax, general legal services, and consulting services. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for potential commercialization of our products and support our operations as a public company, including increased expenses related to legal, accounting, insurance, regulatory and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, directors and officers liability insurance premiums and investor relations activities. 17 Other income and expense Our other income and expense consist of interest income related to our cash at financial institutions, debt extinguishment related to our PPP loan, interest expense from our line of credit, and a finance charge related to conversion of outstanding debt into shares of common stock related to the February 2021 IPO. We expect our other expense to decrease as we paid off our outstanding balance on our line of credit. Results of operations Comparison of the three months ended September 30, 2021 and 2020 The following table summarizes our results of operations: Three Months Ended September 30, Increase/ 2021 2020 (Decrease) Revenue $ – $ 1,040 $ (1,040 ) Operating expenses: Direct costs of service 36,501 42,379 (5,878 ) Sales and marketing 209,207 76,459 132,748 Research and development 119,321 90,965 28,356 General and administrative 1,687,099 277,105 1,409,994 Total operating expense 2,052,128 486,908 1,565,220 Loss from operations (2,052,128 ) (485,868 ) (1,566,260 ) Other income (expense), net: 2,725 (441,319 ) 444,044 Net loss $ (2,049,403 ) $ (927,187 ) $ (1,122,216 ) Revenue Total revenues were $0 for the three months ended September 30, 2021, compared to $1,040 for the three months ended September 30, 2020. The decrease in revenue can be attributed to the August 2020 termination of our legacy platform which eliminated all platform fee and advertising revenue while we continue to develop the new Auddia and Vodacast products to establish new revenue streams. 18 Direct cost of services Direct cost of services decreased by $5,878 or 14%, from $42,379 for the three months ended September 30, 2020 compared to $36,501 for the three months ended September 30, 2021. This decrease primarily resulted from the termination of our legacy services and the decreased need for hosting, staff reductions to the team working on the current platform, and other related direct expenses. We continue to incur direct cost of services expense related to hosting and other music services related to our Auddia App and expect these costs to increase in the future. Sales and marketing Sales and marketing expenses increased by $132,748 or 174%, from $76,459 for the three months ended September 30, 2020 compared to $209,207 for the three months ended September 30, 2021 as we increased marketing expenses primarily related to the promotion of the Auddia and Vodacast Apps. Research and development Research and development expenses increased by $28,356 or 31%, from $90,965 for the three months ended September 30, 2020 to $119,321 for the three months ended September 30, 2021 primarily related to additional staffing on our development team as we continue to advance the Auddia and Vodacast Apps. Our research and development staffing costs were $462,987 and capitalized software expenses of $353,418 for the three months ended September 30, 2021 as compared to staffing costs of $259,626 and capitalized software expenses of $170,396 for the three months ended September 30, 2020. Majority of development time was spent on our Auddia and Vodacast Apps. We have achieved MVP of our Vodacast App and have started amortizing development expenses, however, we continue to make significant and enhancements to the Vodacast App and will continue to incur capitalized costs on our Vodacast App. We have not yet achieved MVP of our Auddia App and will continue to incur additional capitalized costs. General and administrative General and administrative expenses increased by $1,409,994 or 509%, from $277,105 for the three months ended September 30, 2020 compared to $1,687,099 for the three months ended September 30, 2021. The increase resulted primarily from increased stock compensation expense related to employee stock options granted during the third quarter. Stock compensation expense was $735,592 and $17,262 for the three months ended September 30, 2021 and 2020, respectively. The increase in general and administrative expenses also related to being a public company and having higher legal and other professional fees due to preparing to operate as a public company. Interest expense/Other expense, net We had total other income of $2,725 for the three months ended September 30, 2021 as compared to other expense of ($441,319) for the three months ended September 30, 2020, which was a $444,044 or 101% change in other income / expense. This was primarily related to a significant reduction in interest expense in the current year as a result of us paying off our line of credit balance. 19 Comparison of the nine months ended September 30, 2021 and 2020 The following table summarizes our results of operations: Nine Months Ended September 30, Increase/ 2021 2020 (Decrease) Revenue $ – $ 110,919 $ (110,919 ) Operating expenses: Direct costs of service 152,532 361,181 (208,649 ) Sales and marketing 472,322 260,658 211,664 Research and development 261,977 233,403 28,574 General and administrative 3,036,474 1,355,531 1,680,943 Total operating expense 3,923,305 2,210,773 1,712,532 Loss from operations (3,923,305 ) (2,099,854 ) (1,823,451 ) Other income (expense), net: (8,176,116 ) (1,379,694 ) (6,796,422 ) Net loss $ (12,099,421 ) $ (3,479,548 ) $ (8,619,873 ) Revenue Total revenues were $0 for the nine months ended September 30, 2021, compared to $110,919 for the nine months ended September 30, 2020. The decrease in revenue can be attributed to the August 2020 termination of our legacy platform which eliminated all platform fee and advertising revenue while we continue to develop the new Auddia and Vodacast products to establish new revenue streams. Direct cost of services Direct cost of services decreased by $208,649 or 58%, from $361,181 for the nine months ended September 30, 2020 compared to $152,532 for the nine months ended September 30, 2021. This decrease primarily resulted from the termination of our legacy services and the decreased need for hosting, staff reductions to the team working on the current platform, and other related direct expenses. We continue to incur direct cost of services expense related to hosting and other music services related to our Auddia App and expect these costs to increase in the future. 20 Sales and marketing Sales and marketing expenses increased by $211,664 or 81%, from $260,658 for the nine months ended September 30, 2020 compared to $472,322 for the nine months ended September 30, 2021 as we increased marketing expenses primarily related to the promotion and development of the Auddia and Vodacast Apps. Research and development Research and development expenses increased by $28,574 or 12%, from $233,403 for the nine months ended September 30, 2020 to $261,977 for the three months ended September 30, 2021 primarily related to additional staffing on our development team as we continue to advance the Auddia and Vodacast Apps. Our research and development staffing costs were $1,161,880 and capitalized software expenses of $904,956 for the nine months ended September 30, 2021 as compared to staffing costs of $773,128 and capitalized software expenses of $543,835 for the nine months ended September 30, 2020. Majority of development time was spent on our Auddia and Vodacast Apps. We have achieved MVP of our Vodacast App during the third quarter and have started amortizing development expenses, however, we continue to make significant and enhancements to the Vodacast App and will continue to incur capitalized costs on our Vodacast App. We have not yet achieved MVP of our Auddia App and will continue to incur additional capitalized costs. General and administrative General and administrative expenses increased by $1,680,943 or 124%, from $1,355,531 for the nine months ended September 30, 2020 compared to $3,036,474 for the nine months ended September 30, 2021. The increase resulted primarily from increased stock compensation expense related to employee stock options granted during the third quarter. Stock compensation expense was $767,543 and $52,579 for the nine months ended September 30, 2021 and 2020, respectively. The increase in general and administrative expenses also related to being a public company and having higher legal and other professional fees due to preparing to operate as a public company. Interest expense/Other expense, net Total interest expense/other expense increased by $6,796,422, from $1,379,694 for the nine months ended September 30, 2020 compared to $8,176,116 for the nine months ended September 30, 2021. The increase was due almost entirely to a finance charge of $8,141,424 to interest expense related to the conversion of outstanding debt into 6.8 million shares of common stock related to the February 2021 IPO. This was offset by our extinguishment of debt related to our first PPP loan in the amount of $268,662, which was approved in full under the loan forgiveness program and reduced interest expense related to lower outstanding line of credit and related party notes payable balances. Liquidity and capital resources Sources of liquidity We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop and commercialize our Auddia and Vodacast Apps. As of September 30, 2021 and December 31, 2020 we had cash of $8.1M and $0.1M, respectively. We anticipate that operating losses and net cash used in operating activities will increase over the next 12 months as we continue to develop and market our products, perform commercial trials and work on nationally launching all stations on the Auddia App. In February 2021, we completed an IPO of 3,991,818 units, at $4.125 per unit, consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.54 per share. After deducting underwriters commissions and expenses, the Company received net proceeds of approximately $15.2 million. Due to the successful completion of the IPO, all the Company’s existing convertible debt, accrued interest, accrued fees payable to related parties, and promissory notes were converted into shares of common stock. 21 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. In July 2021, certain holders of our publicly traded Series A Warrants exercised approximately 1.1 million warrants for approximately 1.1 million shares of common stock at the cash exercise price of $4.5375 per share and as a result, we received additional cash proceeds of approximately $5.0 million. In addition, we paid the remaining $2.0 million, out of our restricted cash, to pay off and terminate our line of credit. During the nine months ended September 30, 2021, we have reduced our bank debt by $6.0 million, paid down a significant percentage of our accounts payable, and eliminated all deferred compensation owed to a related party. Prior to our IPO, we funded our operations from cash flows generated from operations and cash from the sale of equity securities and debt financing. Cash Flow Analysis Our cash flows from operating activities have historically been significantly impacted by revenues received, our investment in sales and marketing to drive growth, and research and development expenses. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives. The following table summarizes the statements of cash flows for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 % Change Net cash provided by (used in): Operating activities $ (4,320,114 ) $ (1,601,108 ) (169.8% ) Investing activities (967,425 ) (546,521 ) (77.0% ) Financing activities 13,251,608 1,920,356 590.1% Change in cash $ 7,964,069 $ (227,273 ) 3,604.2% Operating activities Cash used in operating activities for the nine months ended September 30, 2021 was $4,320,114, primarily resulting from our net loss of $12,099,421 and changes in working capital of $944,792, partially offset by non-cash charges of $8,724,099 primarily related to our conversion of outstanding debt to common stock from our February 2021 IPO. Changes in working capital primarily related to paying off outstanding accounts payable. Cash used in operating activities for the nine months ended September 30, 2020 was $1,601,108, primarily resulting from our net loss of $3,479,548, partially offset by non-cash charges of $485,709 and changes in working capital of $1,392,731. 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. 22 Investing activities Cash flows used in investing activities for the nine months ended September 30, 2021 consisted primarily of capitalization of software development expenses of $904,957. Cash flows used in investing activities for the nine months ended September 30, 2020 consisted primarily of capitalization of software development expenses of $543,835. Financing activities Cash flows provided by financing activities for the nine months ended September 30, 2021 increase by $20,182,244 related to the issuance of common shares related to our February 2021 IPO, exercise of Series A warrants and proceeds from the second PPP loan, partially offset by a $6,000,000 repayment on our line of credit, and repayment of deferred salary and related party notes payable of $930,636. Cash flows provided by financing activities for the nine months ended September 30, 2020 was $1,920,356 primarily related to the proceeds related to the issuance of convertible notes payable of $1,467,841, related party debt of $490,539 and proceeds from our first PPP loan of $268,662, partially offset by repayments of related party debt and deferred salary of $257,797 and deferred offering costs capitalized of $91,624. Funding Requirements We historically have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $63.4M and $51.4M as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, we had cash of $8.1M and $0.1M, respectively. We believe that the net proceeds from our February 2021 IPO and additional net proceeds of $5.0 million received from the July 2021 Series A Warrant exercises, will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce or eliminate our technology development and commercialization efforts. Our cash is comprised primarily of demand deposit accounts and money market funds. We believe our existing cash and cash generated from operations will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue the development of the Auddia and Vodacast Apps. In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. Our future funding requirements will depend on many factors, including, but not limited to: · the scope, progress, results and costs related to commercial trials and national launch related to our Auddia App and obtaining market acceptance · the ability to attract and retain podcasters to our Vodacast App and retaining listeners on the platform · the costs, timing and ability to continue to develop our technology · effectively addressing any competing technological and market developments · avoiding and defending against intellectual property infringement, misappropriation and other claims 23 Off-balance sheet arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Critical Accounting Policies and Estimates Our condensed financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions. A summary of our critical accounting policies is presented in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020. There were no material changes to our critical accounting policies during the nine months ended September 30, 2021. Emerging growth company and smaller reporting company status The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to not “opt out” of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. 24