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, 2021, which was filed with the SEC on February 17, 2022. 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, 2021 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, 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 look 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, Faidr 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 Faidr App to include all major U.S. radio stations on February 15, 2022 and launched marketing campaigns for Faidr to build an audience and demonstrate consumer interest. We are currently providing consumers a free trial of the App and started trialing subscriptions with a subset of consumers in late second quarter. We have been continuing to enhance the listening experience for consumers by: 1) advancing the training of our proprietary AI technology primarily around talk stations and talk segments on music stations; 2) continual improvements to the user interface and consumer interaction within the App; and 3) exploring additional content choices, including podcasting, some of which will become available in the App during the year. We are running additional subscription trials during the first part of the fourth quarter and expect to provide initial consumer subscription metrics during the fourth quarter. 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 content. 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. 13 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. The Vodacast mobile App is available today through the iOS and Android App stores. We launched marketing campaigns for Vodacast during the second quarter to continue to grow our user base and encourage listeners to download the Vodacast App and listen to all their favorite shows. Because podcasting is the type of audio content that music app users expect to find in their preferred apps and platforms (e.g. TuneIn, iHeart, Audacy, Spotify), we are currently exploring the migration of podcasting and the full suite of tools and features from Vodacast into our Faidr App to provide an all-inclusive and immersive listening experience. During this time, we have paused direct marketing promotion related to the Vodacast App while we explore podcasting into Faidr. 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, 2022, we had an accumulated deficit of approximately $70.0 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. As a part of our capital strategy, we recently implemented certain cost saving initiatives that reduced our quarterly cash spend. This includes certain cost saving initiatives related to our research and development and sales and marketing costs and includes a reduction of headcount and direct promotion of our Apps while we continue to enhance our listening experience. We expect that our expenses and capital requirements will increase again sometime in the future, particularly if and as we: · continue training our proprietary AI technology and make additional product enhancements; · gain significant consumer interest in our products and increase marketing promotion to drive users to our Apps and convert users to subscribers; · identify and license new content that will add value to our products and drive consumer interest; · 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. On November 14, 2022, the Company entered into a secured debt financing agreement with one accredited investor who is an existing stockholder of the Company. The Company will receive $2 million in net proceeds from this financing. 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 the Company's existing universal shelf S-3 registration statement which was declared effective on April 18, 2022. We may still need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from subscriptions, 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 in addition to the cost saving initiatives we have already made effective. 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 September 30, 2022, we had cash of approximately $1.0 million, which we believe should fund our operating expenses and capital expenditure requirements through at least December 31, 2022. 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. 14 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. 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, direct to consumer promotional spend and consulting services, all of which are related to the sales and promotion performed during the period. We expect our sales and marketing expenses to fluctuate period by period as we continue to promote the national commercial launch of our Faidr product and look to generate revenue for our products through customer acquisition, retention and subscription conversion. 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 recently implemented certain cost saving initiatives which includes the reduction of a part of our research and development staff. We still expect to continue to incur substantial research and development expenses and capitalization in the future, even after the reduction of headcount as we continue to develop and enhance 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 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. 15 Results of operations Comparison of the three months ended September 30, 2022 and 2021 The following table summarizes our results of operations: Three Months Ended September 30, 2022 2021 Increase/(Decrease) Revenue $ – $ – $ – Operating expenses: Direct costs of service 32,712 36,501 (3,789 ) Sales and marketing 298,924 209,207 89,717 Research and development 181,596 119,321 62,275 General and administrative 540,220 1,608,344 (1,068,124 ) Depreciation and amortization 274,839 78,755 196,084 Total operating expense 1,328,291 2,052,128 (723,837 ) Loss from operations (1,328,291 ) (2,052,128 ) 723,837 Other income (expense), net: (2,023 ) 2,725 (4,748 ) Net loss $ (1,330,314 ) $ (2,049,403 ) $ 719,089 Revenue Total revenues were $0 for the three months ended September 30, 2022 and September 30, 2021. We are continuing to develop the new Faidr and Vodacast products to establish new revenue streams and are currently running our first subscription trials and expect to start generating our first revenue during the fourth quarter of 2022. Direct cost of services Direct cost of services decreased $3,789 or 10.4%, from $36,501 for the three months ended September 30, 2021 compared to $32,712 for the three months ended September 30, 2022. 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. Sales and marketing Sales and marketing expenses increased by $89,717 or 42.9%, from $209,207 for the three months ended September 30, 2021 to $298,924 for the three months ended September 30, 2022 due to our increase in promotional activity related to the national launch of our Faidr App. The increase in marketing promotion was initially focused on understanding consumer interest and demand for our Faidr App and is shifting focus around user behavior and retention on our App. 16 Research and development Research and development expenses increased by $62,275 or 52.2%, from $119,321 for the three months ended September 30, 2021 to $181,596 for the three months ended September 30, 2022 primarily related to additional staffing on our development team as we continued to advance the Faidr and Vodacast Apps. Our research and development staffing and related development costs were $576,491 and capitalized software expenses of $394,893 for the three months ended September 30, 2022 as compared to staffing and related development costs of $462,987 and capitalized software expenses of $353,418 for the three months ended September 30, 2021. The majority of development time was spent on our Faidr and Vodacast Apps. We started amortizing capitalized development costs associated with Faidr during Q1 2022 and continue to amortize development expense related to Vodacast. General and administrative General and administrative expenses decreased by $1,068,124 or 66.4%, from $1,608,344 for the three months ended September 30, 2021 compared to $540,220 for the three months ended September 30, 2022. The decrease resulted primarily from decreased stock compensation expense related to employee stock options and lower professional and recruiting fees that were incurred during 2021. Depreciation and amortization Depreciation and amortization expenses increased by $196,084 or 249%, from $78,755 for the three months ended September 30, 2021 compared to $274,839 for the three months ended September 30, 2022. The increase is related to amortization of our Faidr and Vodacast Apps, which started amortization during Q1 2022 and Q4 2021, respectively. Other income (expense), net Total other income (expense) decreased by $4,748 or 174.2%, from $2,725 for the three months ended September 30, 2021 to ($2,023) for the three months ended September 30, 2022. The decrease was entirely related to interest expense. Comparison of the nine months ended September 30, 2022 and 2021 The following table summarizes our results of operations: Nine Months Ended September 30, 2022 2021 Increase/(Decrease) Revenue $ – $ – $ – Operating expenses: Direct costs of service 128,806 152,532 (23,726 ) Sales and marketing 1,396,010 472,322 923,688 Research and development 481,611 261,977 219,634 General and administrative 2,400,503 2,952,679 (552,176 ) Depreciation and amortization 721,971 83,795 638,176 Total operating expense 5,128,901 3,923,305 1,205,596 Loss from operations (5,128,901 ) (3,923,305 ) (1,205,596 ) Other income (expense), net: (5,058 ) (8,176,116 ) 8,171,058 Net loss $ (5,133,959 ) $ (12,099,421 ) $ 6,965,462 17 Revenue Total revenues were $0 for the three months ended September 30, 2022 and September 30, 2021. We are continuing to develop the new Faidr and Vodacast products to establish new revenue streams and are currently running our first subscription trials and expect to start generating our first revenue during the fourth quarter of 2022. Direct cost of services Direct cost of services decreased by $23,726 or 15.6%, from $152,532 for the nine months ended September 30, 2021 compared to $128,806 for the nine months ended September 30, 2022. 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. Sales and marketing Sales and marketing expenses increased by $923,688 or 195.6%, from $472,322 for the nine months ended September 30, 2021 to $1,396,010 for the nine months ended September 30, 2022 due to our increase in promotional activity related to the national launch of our Faidr App, and continued promotion for our Vodacast App. The increase in marketing promotion was initially focused on understanding consumer interest and demand for our Faidr App and has continued with shifting focus around user behavior and retention on our App. Research and development Research and development expenses increased by 219,634 or 83.8%, from $261,977 for the nine months ended September 30, 2021 to $481,611 for the nine months ended September 30, 2022 primarily related to additional staffing on our development team as we continue to advance the Faidr and Vodacast Apps. Our research and development staffing and related development costs were $2,155,128 and capitalized software expenses of $1,673,517 for the nine months ended September 30, 2022 as compared to staffing and related development costs of $1,161,880 and capitalized software expenses of $904,956 for the nine months ended September 30, 2021. The majority of development time was spent on our Faidr and Vodacast Apps. We started amortizing capitalized development costs associated with Faidr during Q1 2022 and continue to amortize development expense related to Vodacast. General and administrative General and administrative expenses decreased by $552,176 or 18.7%, from $2,952,679 for the nine months ended September 30, 2021 compared to $2,400,503 for the nine months ended September 30, 2022. The decrease resulted primarily from decreased stock compensation expense related to employee stock options and lower professional and recruiting fees that were incurred during 2021. Depreciation and amortization Depreciation and amortization expenses increased by $638,176 or 761.6%, from $83,795 for the nine months ended September 30, 2021 compared to $721,971 for the nine months ended September 30, 2022. The increase is related to amortization of our Faidr and Vodacast Apps, which started amortization during Q1 2022 and Q4 2021, respectively. Other income (expense), net Total other expense decreased by $8,171,058 or 99.9%, from $8,176,116 for the nine months ended September 30, 2021 to $5,058 for the nine months ended September 30, 2022. The decrease was mostly related 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. In addition, we paid off and terminated our line of credit during 2021 and no longer are incurring interest related to the line of credit. 18 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 September 30, 2022 and December 31, 2021 we had cash of $957,130 and $6,345,291, respectively. We reduced our future quarterly cash spend through a series of cost saving initiatives during the third quarter of 2022 and deferral of promotional activity on the Faidr and Vodacast Apps. We anticipate that operating losses and net cash used in operating activities will continue over the next 12 months as we continue to develop and market our products and work through consumer conversion to subscriptions throughout 2022 and expect the start of subscription conversion during 2023. 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, we received net proceeds of approximately $15.2 million. Due to the successful completion of the IPO, all of our 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, we paid down the outstanding principal balance on our bank line of credit from $6 million to $2 million. We 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. 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 potential 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 operating 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. Cash Flow Analysis Our cash flows from operating activities have historically been significantly impacted by 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, 2022 and 2021: Nine Months Ended September 30, 2022 2021 % Change Net cash provided by (used in): Operating activities $ (3,622,112 ) $ (4,320,114 ) (16.2% ) Investing activities (1,677,326 ) (967,425 ) 73.4% Financing activities (88,723 ) 13,251,608 (100.7% ) Change in cash $ (5,388,161 ) $ 7,964,069 (167.7% ) 19 Operating activities Cash used in operating activities for the nine months ended September 30, 2022 was $3,622,112, primarily resulting from our net loss of $5,133,959, partially offset by non-cash charges of $1,420,457 primarily related to stock compensation expense and depreciation and amortization. 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 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 nine months ended September 30, 2022 and 2021, consisted primarily of capitalization of software development expenses of $1,673,517 and $904,957, respectively. Financing activities Cash flows used in financing activities for the nine months ended September 30, 2022 was $88,723 all from cash used in relation to the net settlement of share-based compensation. Cash flows provided by financing activities for the nine months ended September 30, 2021 was $13,251,608 primarily related to the issuance of common shares for $14,822,459 related to our February 2021 IPO, $4,953,552 related to exercises of our Series A warrants in July 2021, and proceeds from the second PPP loan in the amount of $267,482, 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. Funding Requirements We historically have incurred significant losses and negative cash flows from operations since our inception. As of September 30, 2022, we had cash of approximately $1.0 million. We recently implemented cost saving initiatives to ensure our cash on hand will allow us enough time to finalize certain product enhancements and optimize consumer adoption and subscription. We expect these cost saving measures to reduce our quarterly cash burn rate to approximately $1.0 million. We recently entered into a debt financing agreement for $2.0 million in net proceeds. In addition, we entered into an equity line stock purchase agreement for up to $10.0 million in potential future proceeds, subject to certain limitations. We believe these combined financing arrangements, should capitalize our continued operations through Q3 2023. 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 therefore would need to raise additional funding sooner than we anticipate. We expect to continue to incur costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. Our future funding requirements and timing will depend on many factors, including, but not limited to: · the scope, progress, results and costs related to our Faidr App and obtaining market adoption and subscription conversion; · 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 20 Contractual Obligations The following table summarizes our contractual obligations not on our Balance Sheet as of September 30, 2022 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: Office lease (1) $ 17,088 17,088 – – – Insurance premiums (2) 82,651 82,651 – – – Total operating lease commitments $ 99,739 99,739 – – – (1) Represents minimum payments due for the lease of office space without consideration of additional renewal options (2) Represents premium payments due related to D&O insurance policy from February 2022 – February 2023 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, 2021. There were no material changes to our critical accounting policies during the nine months ended September 30, 2022. 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. 21 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.