AUDDIA INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer Auddia Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted. Overview 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, Faidr and Vodacast. The Faidr 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 Faidr 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 Faidr. The Faidr App is intended to be downloaded by consumers who will pay a subscription fee 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 Faidr 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 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 Faidr and through several consumer trials in 2021 to measure consumer interest and engagement with the App. We are continuing to advance the training of our proprietary AI technology and launching all major U.S. radio stations in the App on February 15, 2022. The Faidr 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. 31 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 in 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 throughout 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 December 31, 2021, we had an accumulated deficit of $64.8 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: · nationally launch our Faidr App and as we continue training our proprietary AI technology and make product enhancements; · continue to develop and expand our technology and functionality to advance the Faidr 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. Faidr 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; and · 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. As of December 31, 2021, we had cash, cash equivalents and investments of $6.3 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. 32 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 Faidr 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 performed during the year related to our products. We expect our sales and marketing expenses to increase substantially as we promote the national commercial launch of our Faidr product on February 15, 2022 and look to generate revenue for our products through customer acquisition and retention. 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 Faidr and Vodacast Apps. 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 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. 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 loans, 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 and will not incur any additional debt conversion charges. 33 Results of operations Comparison of the Years ended December 31, 2021 and 2020 The following table summarizes our results of operations: 2021 2020 Increase/ (Decrease) Revenue $ – $ 110,924 $ (110,924 ) Operating expenses: Direct costs of service 190,187 402,016 (211,829 ) Sales and marketing 740,652 322,369 418,283 Research and development 399,521 106,053 293,468 General and administrative 4,072,419 1,290,970 2,781,449 Depreciation and amortization 166,656 372,366 (205,710 ) Total operating expense 5,569,435 2,493,774 3,075,661 Loss from operations (5,569,435 ) (2,382,850 ) (3,186,585 ) Other income (expense), net: (7,908,634 ) (1,668,371 ) (6,240,263 ) Net loss $ (13,478,069 ) $ (4,051,221 ) $ (9,426,848 ) Revenue Total revenues for the twelve months ended December 31, 2021 were $0, which was a decline of $110,924 or 100%, from $110,924 from the twelve months ended December 31, 2020. The decrease in revenue can be attributed to the August 2020 termination of our legacy platform which eliminated all platform fee and advertising revenue while we continue to develop the new Faidr and Vodacast products to establish new revenue streams. Direct Cost of Services Direct Cost of Services decreased $211,829 or 52.7%, from $402,016 for the year ended December 31, 2020 compared to $190,187 for the year ended December 31, 2021. This decrease primarily resulted from the termination of our legacy services and the decreased need for hosting, staff reductions to the team working on the current platform, and other related direct expenses. We continue to incur direct cost of services expense related to hosting and other music services related to our Faidr App and expect these costs to increase in the future. 34 Sales and marketing Sales and marketing expenses increased by $418,283 or 129.8%, from $322,369 for the year ended December 31, 2020 to $740,652 for the year ended December 31, 2021 as we established and hired our internal marketing team and increased our promotion expenses related to the consumer trials for Faidr and podcaster promotion for Vodacast. Research and development Research and development expenses increased by $293,469 or 276.7%, from $106,053 for the year ended December 31, 2020 to $399,521 for the year ended December 31, 2021 primarily related to additional staffing on our development team as we continue to advance the Faidr and Vodacast Apps. Our research and development staffing costs were $1,835,451 and capitalized software expenses of $1,472,290 for the year ended December 31, 2021 as compared to staffing costs of $947,318 and capitalized software expenses of $867,578 for the year ended December 31, 2020. Majority of development time was spent on our Faidr and Vodacast Apps. We started amortizing development expenses toward Vodacast, however, we continue to make significant enhancements to the Vodacast App and will continue to incur capitalized costs and additional amortization on our Vodacast App. We are continuing to develop and add significant capabilities to our Faidr App up through and continuing beyond our national launch on February 15, 2022. We anticipate amortization expense on our Faidr App to start in 2022. General and administrative General and administrative expenses increased by $2,781,449 or 215.5%, from $1,290,970 for the year ended December 31, 2020 compared to $4,072,419 for the year ended December 31, 2021. The increase resulted primarily from increased stock compensation expense related to employee stock options granted during the year and expenses related to operating as a public company. Stock compensation expense was $1,237,480 and $69,841 for the year ended December 31, 2021 and 2020, respectively. We saw an increase of approximately $918,000 in public company expenses related to legal and other professional fees preparing to operate as a public company. We also saw an increase of approximately $500,000 in general and administrative expenses related to payroll expenses as we increased salaries for full time positions that were previously reduced prior to our February 2021 IPO, in addition to hiring a full time Chief Financial Officer during the year. Interest expense/Other expense, net Total interest expense/other expense increased by $6,240,263 or 374.0%, from $1,668,371 for the year ended December 31, 2020 to $7,908,634 for the year ended December 31, 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 PPP loans in the amount of $536,144, which was approved in full under the loan forgiveness program and reduced interest expense of $1,361,858 related to lower outstanding line of credit and related party notes payable balances. Income taxes Since our inception in 2012, until the corporate conversion in February 2021, we were organized as a Colorado limited liability company for federal and state income tax purposes and treated as a partnership for U.S. income tax purposes. As such, we were not viewed as a taxpaying entity in any jurisdiction and do not require a provision for income taxes. Each member of our company was responsible for the tax liability, if any, related to its proportionate share of our taxable income. Effective on February 16, 2021, we became treated as a corporation for U.S. income tax purposes and thus became subject to U.S. federal, state and local income taxes and are be taxed at the prevailing corporate tax rates. Among other things, we may begin to generate net operating losses at the corporate level. We will account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements but have not been reflected in taxable income. A valuation allowance is established to reduce deferred tax assets to its estimated realizable value, which is zero based on our operating history. 35 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 Faidr and Vodacast Apps. As of December 31, 2021 and 2020 we had cash of $6,345,291 and $117,914, 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 Faidr App. In February 2021, we completed an IPO of 3,991,818 units, at $4.125 per unit, consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.54 per share. After deducting underwriters’ commissions and expenses, the Company received net proceeds of approximately $15.2 million. Due to the successful completion of the IPO, all the Company’s existing convertible debt, accrued interest, accrued fees payable to related parties, and promissory notes were converted into shares of common stock. Following the Company’s IPO in February 2021, the Company paid down the outstanding principal balance on its bank line of credit from $6 million to $2 million. The Company and the bank agreed to reduce the maximum available balance for the line of credit to $2 million. 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 year ended December 31, 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 years ended December 31, 2021 and 2020: Year Ended December 31, 2021 2020 % Change Net cash provided by (used in): Operating activities $ (5,471,545 ) $ (1,992,381 ) (174.6 %) Investing activities (1,552,686 ) (870,264 ) (78.4 %) Financing activities 13,251,608 2,690,328 392.6 % Change in cash, cash equivalents, restricted cash and restricted cash equivalents $ 6,227,377 $ (172,317 ) 3,713.9 % 36 Operating Activities Cash used in operating activities for the year ended December 31, 2021 was $5,471,545, primarily resulting from our net loss of $13,478,069 and change in working capital of $1,002,893 related to paying down our accounts payable balance from the prior year, partially offset by non-cash charges of $9,009,417. 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. Cash provided by operating activities for the year ended December 31, 2020 primarily consisted of payments received from our clients. Cash used in operating activities primarily consisted of personnel-related expenditures, payments included costs of operations, and other sales efforts, research and development and administrative costs. Investing Activities Cash flows used in investing activities for the year ended December 31, 2021 consisted primarily of capitalization of software development expenses of $1,472,290. Cash flows used in investing activities for the year ended December 31, 2020 consisted primarily of capitalization of software development expenses of $867,578. Financing Activities Cash flows provided by financing activities for the year ended December 31, 2021 increased by $10,561,280 from the prior year, primarily related to $20,324,293 from the issuance of common shares related to our February 2021 IPO, exercise of Series A warrants and proceeds from our PPP loans. This was 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 from financing activities for the year ended December 31, 2020 decreased from the prior year period primarily due to reduced fund raising from the issuance of common and preferred stock and related third party debt. Funding Requirements We historically have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $64,838,389 and $51,360,320 as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, we had cash of $6,345,291 and $117,914, respectively. We believe that the net proceeds from our February 2021 IPO and additional net proceeds of $4,953,552 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. 37 We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue the development of the Faidr 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 Faidr 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 Contractual Obligations The following table summarizes our contractual obligations not on our Balance Sheet as of December 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Payments due by period Total Less Than 1 Year 1 - 3 Years 4 - 5 Years More Than 5 Years Operating lease commitments (1) $ 35,748 35,748 -0- -0- -0- (1) Represents minimum payments due for the lease of office space without consideration of renewal options 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 financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions. Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are described below. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. 38 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 $1,515,741 and $867,578 were capitalized in 2021 and 2020, respectively. Amortization of expense of capitalized software development costs were $146,737 and $368,332 for the years ended December 31, 2021 and 2020, respectively and are included in depreciation and amortization expense. Equity-based compensation Certain of our employees and consultants have received grants of common shares in our company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified. The common shares receive distributions if any in an order of priority in accordance with our limited liability company agreement. The fair value of each award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation. Prior to our IPO in February 2021, we were a private company with no active public market for our common equity. Therefore, we have periodically determined the overall value of our company and the estimated per share fair value of our common equity at their various dates using contemporaneous valuations performed with the assistance of a third party specialist and in accordance with the guidance outlined in the American Institute of CPA’s Practice Aid.