AUDDIA INC. 10-Q

Item 1. Financial Statements Auddia Inc. Condensed Balance Sheets (Unaudited) As of September 30, 2022 December 31, 2021 ASSETS Current assets: Cash $ 957,130 $ 6,345,291 Accounts receivable, net 35 87 Prepaids and other current assets 53,983 – Total current assets 1,011,148 6,345,378 Non-current assets: Property and equipment, net 48,045 72,766 Software development costs, net 4,143,147 3,163,071 Prepaids and other non-current assets – 52,918 Total non-current assets 4,191,192 3,288,755 Total assets $ 5,202,340 $ 9,634,133 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 315,599 $ 223,196 Share-based compensation liability 119,388 – Total current liabilities 434,987 223,196 Commitments and contingencies – – Stockholders' equity: Preferred stock - $ 0.001 par value, 100,000,000 authorized and 0 shares issued and outstanding at September 30, 2022 and December 31, 2021 – – Common stock - $ 0.001 par value, 100,000,000 authorized and 12,514,763 and 12,416,408 shares issued and outstanding at September 30, 2022 and December 31, 2021 12,514 12,416 Additional paid-in capital 74,727,187 74,236,910 Accumulated deficit ( 69,972,348 ) ( 64,838,389 ) Total stockholders’ equity 4,767,353 9,410,937 Total liabilities and stockholders’ equity $ 5,202,340 $ 9,634,133 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, 2022 2021 2022 2021 Revenue $ – $ – $ – $ – Operating expenses: Direct cost of services 32,712 36,501 128,806 152,532 Sales and marketing 298,924 209,207 1,396,010 472,322 Research and development 181,596 119,321 481,611 261,977 General and administrative 540,220 1,608,344 2,400,503 2,952,679 Depreciation and amortization 274,839 78,755 721,971 83,795 Total operating expenses 1,328,291 2,052,128 5,128,901 3,923,305 Loss from operations ( 1,328,291 ) ( 2,052,128 ) ( 5,128,901 ) ( 3,923,305 ) Other income (expense): Finance charge – convertible debt – – – ( 8,141,424 ) PPP loan extinguishment – – – 268,662 Interest expense ( 2,023 ) 2,720 ( 5,058 ) ( 306,555 ) Interest income – 5 – 3,201 Total other income (expense) ( 2,023 ) 2,725 ( 5,058 ) ( 8,176,116 ) Net loss before income taxes ( 1,330,314 ) ( 2,049,403 ) ( 5,133,959 ) ( 12,099,421 ) Income taxes – – – – Net loss $ ( 1,330,314 ) $ ( 2,049,403 ) $ ( 5,133,959 ) $ ( 12,099,421 ) Net loss per share attributable to common stockholders Basic and diluted $ ( 0.11 ) $ ( 0.17 ) $ ( 0.41 ) $ ( 1.25 ) Weighted average common shares outstanding Basic and diluted 12,514,763 12,376,987 12,498,206 9,717,915 The accompanying notes are an integral part of these unaudited condensed financial statements. 2 Auddia Inc. Condensed Statements of Changes in Stockholders’ Equity (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 $ 38,256,854 $ ( 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, 2022 Common Stock Additional Paid-In Accumulated Shares Value Capital Deficit Total Balance, December 31, 2021 12,416,408 $ 12,416 $ 74,236,910 $ ( 64,838,389 ) $ 9,410,937 Exercise of restricted stock units and warrants 98,355 98 ( 98 ) – – Share-based compensation – – 698,486 – 698,486 Reclassification of share-based compensation award to liability – – ( 208,111 ) ( 208,111 ) Net loss – – – ( 5,133,959 ) ( 5,133,959 ) Balance, September 30, 2022 12,514,763 $ 12,514 $ 74,727,187 $ ( 69,972,348 ) $ 4,767,353 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, 2022 2021 Cash flows from operating activities: Net loss $ ( 5,133,959 ) $ ( 12,099,421 ) 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 721,971 83,794 Share-based compensation 698,486 767,543 Gain on PPP loan extinguishment – ( 268,662 ) Change in assets and liabilities: Accounts receivable 52 128 Prepaids and other non-current assets ( 1,065 ) ( 123,924 ) Accounts payable and accrued liabilities 92,403 ( 820,996 ) Net cash used in operating activities ( 3,622,112 ) ( 4,320,114 ) Cash flows from investing activities: Software capitalization ( 1,673,517 ) ( 904,957 ) Purchase of property and equipment ( 3,809 ) ( 62,468 ) Net cash used in investing activities ( 1,677,326 ) ( 967,425 ) Cash flows from financing activities: Net settlement of share-based compensation awards ( 88,723 ) – Proceeds from issuance of common shares – 19,899,762 Repayments of related party debt and deferred salary – ( 930,636 ) Repayments of line of credit – ( 6,000,000 ) Proceeds from issuance of PPP loan – 267,482 Proceeds from issuance of promissory notes payable – 15,000 Net cash (used in) provided by financing activities ( 88,723 ) 13,251,608 Net (decrease) increase in cash ( 5,388,161 ) 7,964,069 Cash, beginning of period 6,345,291 117,914 Cash, end of period $ 957,130 $ 8,081,983 Supplemental disclosures of cash flow information: Cash paid for interest $ 5,058 $ 66,412 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 Series A 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 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 Future Funding Requirements 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, 2022 or December 31, 2021. 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, 2022 and December 31, 2021, the Company had $ 628,330 and $ 5,910,758 , 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. The Company historically has incurred significant losses and negative cash flows from operations since our inception. As of September 30, 2022, the Company had cash of approximately $ 1.0 million . As described in more detail in Note 10, on November 14, 2022, the Company entered into a secured debt financing agreement for $2.0 million and an equity line facility for additional proceeds. The Company believes that its cash on hand as of September 30, 2022 combined with the $2.0 million of cash received from the November 14, 2022 secured debt financing plus funds available from the equity line facility will be sufficient to fund current operations for the next twelve months. The Company has based these estimates, however, on assumptions that may prove to be wrong, and could spend available financial resources much faster than we currently expect. The Company will need to raise additional funds to continue funding our technology development and commercialization efforts beyond twelve months. Management intends to secure such additional funding. 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 considered impaired and expensed during the period of such determination. Software development costs of $ 394,893 and $ 353,418 were capitalized for the three months ended September 30, 2022 and 2021, respectively and $ 1,673,517 and $ 904,956 were capitalized for the nine months ended September 30, 2022 and 2021, respectively. Amortization of capitalized software development costs were $ 262,703 and $ 73,369 for the three months ended September 30, 2022 and 2021, respectively and $ 693,441 and $ 73,369 for the nine months ended September 30, 2022 and 2021, respectively and are included in depreciation and amortization expense. Revenue Recognition Revenue will be measured according to Accounting Standards Codification (“ASC”) 606, Revenue – Revenue from Contracts with Customers, and will be recognized based on consideration specified in a contract with a customer and will exclude any sales incentives and amounts collected on behalf of third parties. We will recognize revenue when we satisfy a performance obligation by transferring control over a service or product to a customer. We will report revenues net of any tax assessed by a governmental authority that is both imposed on, and concurrent with, a specific revenue-producing transaction between a seller and a customer in our condensed statements of operations. Collected taxes will be recorded within Other current liabilities until remitted to the relevant taxing authority. 6 Subscriber revenue will consist primarily of subscription fees and other ancillary subscription-based revenues. Revenue will be recognized on a straight-line basis when the performance obligations to provide each service for the period are satisfied, which is over time as our subscription services are continuously available and can be consumed by customers at any time. There is no revenue recognized for unpaid trial subscriptions. Customers may pay for the services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue will be recognized as revenue in our statement of operations as the services are provided. Share-Based Compensation The Company accounts for share-based compensation arrangements with employees, directors, and consultants and recognizes the compensation expense for share-based awards based on the estimated fair value of the awards on the date of grant in accordance with ASC 718. Compensation expense for all share-based awards is based on the estimated grant-date fair value and recognized in earnings over the requisite service period (generally the vesting period). The Company records share-based compensation expense related to non-employees over the related service periods. Certain stock awards include a net-share settlement feature that provides the grantee an option to withhold shares to satisfy tax withholding requirements and are classified as a share-based compensation liability. Cash paid to satisfy tax withholdings is classified as financing activities in the condensed statements of cash flows. 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. Note 2 – Property & Equipment and Software Development Costs Property and equipment and software development costs consisted of the following as of: Schedule of property, equipment and software development costs September 30 2022 December 31, 2021 Computers and equipment $ 771,127 $ 767,318 Furniture 7,262 7,262 Software 5,228 5,228 Accumulated depreciation ( 735,572 ) ( 707,042 ) Total property and equipment, net $ 48,045 $ 72,766 Software development costs 6,372,368 $ 4,698,752 Accumulated amortization ( 2,229,122 ) ( 1,535,680 ) Total software development costs, net $ 4,143,147 $ 3,163,071 The Company recognized depreciation expense of $ 28,529 and $ 10,426 for the nine months ended September 30, 2022 and 2021, respectively related to property and equipment and amortization expense of $ 693,441 and $ 73,369 for the nine months ended September 30, 2022 and 2021, respectively related to software development costs. 7 Note 3 – Balance Sheet Disclosures Accounts payable and accrued liabilities consist of the following: Schedule of accounts payable and accrued liabilities September 30, 2022 December 31, 2021 Accounts payable and accrued expenses $ 303,420 $ 210,929 Credit cards payable 12,179 12,267 Accounts payable and accrued liabilities $ 315,599 $ 223,196 Note 4 – Line of Credit The Company had a line of credit which was repaid in full on 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 nine months ended September 30, 2022 and 2021 was $ 0 and $ 66,412 , respectively. The line of credit was collateralized by all assets of the Company, including $2,000,000 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 $6,000,000 to $2,000,000 and the available principal balance for the line of credit was reduced from $6,000,000 to $2,000,000. Further, the $6,000,000 of cash collateral previously provided by the two shareholders was released. The remaining principal balance of $2,000,000 was repaid in full and the line of credit was terminated on July 8, 2021. The shareholder who previously provided the $2,000,000 control account had a collateral agreement with the Company which is described in Note 6. This agreement was terminated in March 2021. Note 5 – Convertible Notes Payable, Notes Payable to Related Parties and Promissory Notes Convertible notes payable The Company had convertible notes outstanding at December 31, 2020 in the amount of $ 2,295,305 , inclusive of accrued interest. 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 nine months ended September 30, 2022 and 2021 was $ 0 and $ 16,586 , 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 $2,000,000. 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 nine months ended September 30, 2022 and 2021 was $ 0 and $ 208,727 , respectively. 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. 8 Promissory notes payable The Company had promissory notes payable outstanding that were scheduled to mature on December 31, 2021 and accrue interest at 6%. The notes and accrued interest would convert into equity, upon a qualified IPO 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 nine months ended September 30, 2022 and 2021 was $ 0 and $ 14,454 , respectively. In conjunction with the February 2021 IPO, all of the Promissory Notes collectively 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 in February 2021. 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 . The Company paid this deferred compensation in the first quarter of 2021. The Company had convertible notes payable to related parties in the amounts of $ 200,000 and $ 50,000 , without a stated interest rate or stated maturity date. Two other existing investors entered into a convertible note related to services provided to the Company in the amount of $ 17,197 . The Company also issued a convertible note payable to a related party for consulting services incurred by the Company in the amount of $ 486,198 . The Company paid these Notes in the first quarter of 2021. The Company had a short term loan of $ 500,000 short term loan from a related party. The balance was repaid in February 2021. Cares Act Paycheck Protection Program loan 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 was set to mature in January 2023. The PPP Loans bore 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 contained 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. Pursuant to the terms of the CARES Act and the PPP, the Company applied for forgiveness for both the PPP Loans. 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 year ended December 31, 2021. On November 2, 2021, the Company received confirmation that the Second Loan was approved for forgiveness and the Company recorded $ 267,482 in PPP loan extinguishment to other income during the year ended December 31, 2021. The amount eligible for forgiveness was 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. 9 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 exercised its first six month renewal option to extend the lease through November 2022. 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 expenses Three Months Ended September 30 Nine Months Ended September 30 2022 2021 2022 2021 Rent expense $ 39,935 22,397 $ 83,117 53,887 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 Non-Qualified Average Options Exercise Price Outstanding - December 31, 2021 1,504,791 $ 2.96 Granted 683,136 1.46 Forfeited/canceled ( 517,254 ) 2.64 Exercised – – Outstanding – September 30, 2022 1,670,673 $ 2.44 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 1.07 68,518 $ 2.70 $2.90 53,128 $ 2.90 5.29 53,128 $ 2.90 $4.26 171,197 $ 4.26 6.88 157,185 $ 4.26 $2.79 772,194 $ 2.79 8.87 380,299 $ 2.79 $1.79 216,250 $ 1.79 9.39 22,500 $ 1.79 $1.21 389,386 $ 1.21 9.95 194,692 $ 1.21 Total – September 30, 2022 1,670,673 $ 2.44 8.55 876,322 $ 2.68 ________________________ * Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively. 10 During the nine months ended September 30, 2022, the Company granted 683,136 stock options to certain executives and key employees. Under the terms of the option agreements, the options are subject to certain vesting requirements. 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. Restricted Stock Units The following table presents the activity for restricted stock units outstanding: Schedule of warrant activity Weighted Restricted Average Stock Units Exercise Price Outstanding - December 31, 2021 424,500 $ – Granted 150,000 – Forfeited/canceled – $ – Vested/issued ( 143,625 ) – Outstanding – September 30, 2022 430,875 $ – During the nine months ended September 30, 2022, the Company granted 150,000 restricted stock units. Under terms of the restricted stock agreements, the restricted stock units are subject to a four year vesting schedule. During the nine months ended September 30, 2022, certain restricted stock unit holders elected a net-share settlement for vested shares to satisfy income tax requirements. The Company applied modification accounting in accordance with ASC 718, and reclassified these share-based awards from equity classification to liability classification. The Company recognized a share-based compensation liability as of September 30, 2022 of $ 119,388 related to the fair value of vested shares over the service period. The Company recognized share-based compensation expense related to stock options and restricted stock units in the amounts of $ 698,486 and $ 767,543 for the nine months ended September 30, 2022 and 2021, respectively. The remaining unvested share-based compensation expense of $ 2,444,906 is expected to be recognized over the next 45 months. Warrants The following table presents the activity for warrants outstanding: Schedule of warrant activity Weighted Warrants Average Outstanding Exercise Price Outstanding - December 31, 2021 4,172,247 $ 4.80 Granted – – Forfeited/cancelled/restored – – Exercised ( 148 ) 0.87 Outstanding – September 30, 2022 4,172,099 $ 4.80 In connection with the February 2021 IPO, the Company issued 4,590,590 Series A warrants to purchase shares of common stock. 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. 11 During the nine months ended September 30, 2022 certain holders of our Pre-IPO warrants exercised 148 warrants for 112 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 3.19 years as of September 30, 2022. 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, 2022 and 2021, 6,271,219 shares and 4,632,776 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 On November 14, 2022, the Company entered into a secured debt financing agreement (the “Convertible Note”) with one accredited investor who is a current existing stockholder of the Company. The Convertible Note has a face value of $2.2 million with a 10% discount, in which the Company will receive $2 million in net proceeds. The Convertible Note has a maturity date of May 31, 2023 and can be extended at the Company’s option to November 30, 2023. The Convertible Note bears interest at 10%. The Convertible Note includes 300,000 warrants at a strike price of 150% of the most recent closing price. In addition, on November 14, 2022, the Company entered into an equity line stock purchase agreement with one accredited investor. The equity line facility is for up to $10 million of potential sales subject to certain limitations, would occur, at the Company's option, from time to time over the period ending December 31, 2023. The equity line will be structured as a registered take down off of the Company's existing universal shelf S-3 registration statement which was declared effective on April 18, 2022. 12