AUDDIA INC. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page Auddia Inc. Annual Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 229 ) 40 Balance Sheets as of December 31, 2022, and 2021 42 Statements of Operations, Years Ended December 31, 2022, and 2021 43 Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2022, and 2021 44 Statements of Cash Flows, Years Ended December 31, 2022, and 2021 45 Notes to Financial Statements 46 40 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Auddia Inc. Boulder, Colorado Opinion on the Financial Statements We have audited the accompanying balance sheets of Auddia Inc. (the “Company”) at December 31, 2022 and 2021, and the related statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a deficiency in working capital and shareholders’ equity that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 41 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Intangible Assets Impairment Assessment As described in Notes 1 and 2 to the financial statements, the Company has software development costs of approximately $4.1 million at December 31, 2022. No directly observable market inputs are available to measure the fair value to determine if the asset is recoverable. Therefore, an estimate is derived indirectly and is based on a mix of cash flow and market models. The estimate that management used in calculating the fair values depend on assumptions specific to the nature of the markets in which its product operates with regard to the amount and timing of projected future revenues, operating cash flows, long-term subscriber demand forecasts, actions of competitors (competing content), capital expenditures, and future tax rates. The principal considerations for our determination that performing procedures relating to the intangible assets impairment assessment is a critical audit matter are the significant judgment by management when developing the fair value of the intangible assets. This led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the amount and timing of projected future cash flows. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing management’s process for developing the fair value estimate; evaluating the appropriateness of the valuation techniques; testing the completeness and accuracy of underlying data used in the model; and evaluating the significant assumptions used by management, including the amount and timing of projected future cash flows. Evaluating management’s assumptions related to the amount and timing of projected future cash flows and evaluating whether the assumptions used by management were reasonable considering the current and past performance of the intangible assets, the consistency with external market and industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ Daszkal Bolton LLP Daszkal Bolton LLP We have served as the Company’s auditor since 2020 Boca Raton, Florida March 20, 2023 42 Auddia Inc. Balance Sheets December 31, 2022, and 2021 December 31, 2022 2021 ASSETS Current assets: Cash $ 1,661,434 $ 6,345,291 Accounts receivable, net 137 87 Total current assets 1,661,571 6,345,378 Non-current assets: Property and equipment, net of accumulated depreciation 41,080 72,766 Software development costs, net of accumulated amortization 4,134,225 3,163,071 Deferred offering costs 222,896 – Prepaids and other non-current assets 51,754 52,918 Total non-current assets 4,449,955 3,288,755 Total assets $ 6,111,526 $ 9,634,133 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 324,138 $ 223,196 Notes payable to investors 1,775,956 – Stock awards liability 161,349 – Total current liabilities 2,261,443 223,196 Commitments and contingencies – – Shareholders' equity: Preferred stock - $ 0.001 par value, 10,000,000 authorized and 0 shares issued and outstanding – – Common stock - $ 0.001 par value, 100,000,000 authorized and 12,654,949 and 12,416,408 shares issued and outstanding at December 31, 2022 and December 31, 2021 12,654 12,416 Additional paid-in capital 75,573,263 74,236,910 Accumulated deficit ( 71,735,834 ) ( 64,838,389 ) Total shareholders' equity 3,850,083 9,410,937 Total liabilities and shareholders' equity $ 6,111,526 $ 9,634,133 See Accompanying Notes to Financial Statements. 43 Auddia Inc. Statements of Operations For the Years Ended December 31, 2022, and 2021 Year Ended December 31, 2022 2021 Revenue $ – $ – Operating expenses: Direct cost of services 180,690 190,187 Sales and marketing 1,673,692 740,652 Research and development 654,879 399,521 General and administrative 3,223,520 4,072,419 Depreciation and amortization 991,639 166,656 Total operating expenses 6,724,420 5,569,435 Loss from operations ( 6,724,420 ) ( 5,569,435 ) Other (expense) income: Finance charge - convertible debt – ( 8,141,424 ) Extinguishment of PPP loan – 536,144 Interest expense ( 173,027 ) ( 306,555 ) Interest income 1 3,201 Total other expense ( 173,026 ) ( 7,908,634 ) Net loss before taxes ( 6,897,446 ) ( 13,478,069 ) Taxes – – Net loss $ ( 6,897,446 ) $ ( 13,478,069 ) Net loss per share attributable to common shares Basic and diluted $ ( 0.55 ) $ ( 1.30 ) Weighted average common shares outstanding Basic and diluted 12,518,894 10,397,772 See Accompanying Notes to Financial Statements. 44 Auddia Inc. Statements of Changes in Stockholders’ Equity For the Years Ended December 31, 2022, and 2021 Common Stock Additional Number of Shares Par Value Paid-In- Capital Accumulated Deficit Total Balance, December 31, 2020 485,441 $ 486 $ 38,256,584 $ ( 51,360,320 ) $ ( 13,103,250 ) Issuance of common shares 4,021,818 4,022 14,603,768 – 14,607,790 Exercise of Series A Warrants 1,091,692 1,092 4,952,460 – 4,953,552 Exercise of Pre-IPO Warrants 2,887 2 ( 2 ) – – Conversion of debt obligations 6,814,570 6,814 15,186,619 – 15,193,433 Share-based compensation – – 1,237,481 – 1,237,481 Net loss – – – ( 13,478,069 ) ( 13,478,069 ) Balance, December 31, 2021 12,416,408 $ 12,416 $ 74,236,910 $ ( 64,838,389 ) $ 9,410,937 Issuance of common shares 140,186 140 222,756 – 222,896 Issuance of warrants – – 361,878 – 361,878 Exercise of restricted stock units and warrants 98,355 98 ( 98 ) – – Reclassification of share-based compensation award to liability – – ( 250,071 ) – ( 250,071 ) Share-based compensation – – 1,001,889 – 1,001,889 Net loss – – – ( 6,897,446 ) ( 6,897,446 ) Balance, December 31, 2022 12,654,949 $ 12,654 $ 75,573,263 $ ( 71,735,834 ) $ 3,850,083 See Accompanying Notes to Financial Statements. 45 Auddia Inc. Statements of Cash Flows For the Years Ended December 31, 2022, and 2021 Year Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 6,897,446 ) $ ( 13,478,069 ) Adjustments to reconcile net loss to net cash used in operating activities: Finance charge associated with debt issuance cost 137,834 8,141,424 Depreciation and amortization 991,639 166,656 Share-based compensation expense 1,001,889 1,237,481 Extinguishment of PPP loan – ( 536,144 ) Change in assets and liabilities: Accounts receivable ( 50 ) 41 Prepaids and other non-current assets 1,164 ( 47,418 ) Accounts payable and accrued liabilities 12,220 ( 955,516 ) Net cash used in operating activities ( 4,752,750 ) ( 5,471,545 ) Cash flows from investing activities: Software capitalization ( 1,927,298 ) ( 1,472,290 ) Purchase of property and equipment ( 3,809 ) ( 80,396 ) Net cash used in investing activities ( 1,931,107 ) ( 1,552,686 ) Cash flows from financing activities: Proceeds from PPP Loan – 267,482 Proceeds from issuance of promissory notes payable, net of OID 2,000,000 15,000 Repayment of deferred salary – ( 661,651 ) Repayments to Line of Credit – ( 6,000,000 ) Repayments of related parties notes payable and deferred salary – ( 299,198 ) Proceeds from related party debt – 30,213 Proceeds from issuance of common shares – 20,041,811 Deferred offering costs capitalized – ( 142,049 ) Net cash provided by financing activities 2,000,000 13,251,608 Net (decrease) increase in cash ( 4,683,857 ) 6,227,377 Cash, beginning of year 6,345,291 117,914 Cash, end of year $ 1,661,434 $ 6,345,291 Supplemental disclosures of cash flow information Cash paid for interest $ 7,082 $ 66,412 Supplemental disclosures of non-cash activity: Shares issued for conversion of indebtedness $ – $ 15,193,433 PPP loan extinguishment $ – $ 536,144 See Accompanying Notes to Financial Statements. 46 Auddia Inc. Notes to Financial Statements For the Year Ended December 31, 2022 Note 1 – Description of Business, Basis of Presentation and Summary of Significant Accounting Policies Description of Business Auddia Inc., formerly Clip Interactive, LLC, (the “Company”, “Auddia”, “we”, “our”) is a technology company that is reinventing how consumers engage with audio through the development of a proprietary AI platform for audio and innovative technologies for podcasts. Clip Interactive, LLC was initially formed as a Colorado limited liability company on January 14, 2012, and on November 25, 2019 changed its trade name to Auddia. On February 16, 2021, the Company completed an initial public offering (the “IPO”) of 3,991,818 units, at $4.125 per unit, consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.54 per share. In addition, the underwriters exercised their option to purchase 598,772 Series A warrants to cover over-allotments and were issued 319,346 in representative warrants at an exercise price of $5.15625 per share. After deducting underwriter’s 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”). Use of Estimates The preparation of 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 periods. Actual results could differ from those estimates. The 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. 47 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 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 December 31, 2022 or 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 December 31, 2022 and December 31, 2021, the Company had approximately $ 1.4 million and $ 5.9 million , 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. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years . 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 $ 1,927,298 and $ 1,472,290 were capitalized for the years ended December 31, 2022, and 2021, respectively. Amortization of capitalized software development costs were $ 956,144 and $ 146,737 for the years ended December 31, 2022 and 2021, respectively and are included in depreciation and amortization expense. Deferred Offering Costs In November 2022, the Company entered into a Common Stock Purchase Agreement. Pursuant to such, the Company has the right, but not the obligation, to require the investor to purchase up to $10,000,000 in aggregate gross purchase price of newly issued shares of the Company common stock, subject to eligibility under the Company’s Form S-3. The Company’s right to sell shares under this agreement extends to December 2023. In consideration for the commitments by the investor under the agreement, the Company issued 140,186 shares of common stock to the investor. The Company recognized $ 222,896 of deferred offering costs relating to the issuance of these shares. 48 The Company deferred direct and incremental costs associated with its IPO that occurred in February 2021. The Company capitalized deferred offering costs of $ 142,049 during the year ended December 31, 2021, which was netted against IPO proceeds in February 2021. Deferred offering costs consisted principally of legal, advisory, and consulting fees incurred in connection with the formation and preparation for the IPO. Long-Lived Assets The Company reviews its tangible and limited lived intangible long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. If a potential impairment is indicated, the Company compares the carrying amount of the asset to the undiscounted future cash flows associated with the asset. In the event the future cash flows are less than their carrying value, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The Company determined long-lived assets were no t impaired at December 31, 2022 and 2021. Income Taxes The Company accounts 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. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized in the future. The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense. Prior to the Company’s conversion to a Delaware corporation in February 2021, the Company was a limited liability company and had elected to be treated as a pass-through entity for income tax purposes. Accordingly, taxable income and losses of the Company were reported on the income tax returns of its members, and no provision for federal income taxes have been recorded in the accompanying financial statements. Had the Company been a taxable entity, no provision for income taxes would have been recorded as the Company has sustained losses since inception. 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 statements of operations. Collected taxes, if applicable, will be recorded within other current liabilities until remitted to the relevant taxing authority. Subscriber revenue will consist primarily of subscription fees and other ancillary subscription-based revenues. Revenue is 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 is recognized as revenue in our statement of operations as the services are provided. 49 Advertising Costs The Company expenses advertising costs as incurred. Advertising expense for the year ended December 31, 2022, and December 31, 2021, was $ 760,940 and $ 130,565 , respectively. 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. 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. Net Loss per Share Basic loss per share common share is calculated based on the weighted-average number of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share . Diluted net (loss) income per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. Potential common shares are composed of shares of common issuable upon the exercise of options and warrants. Liquidity, Capital Resources and Going Concern Our existing cash of $1.66 million at December 31, 2022 will only be sufficient to fund our current operating plans into the second quarter of 2023. The Company has based these estimates, however, on assumptions that may prove to be wrong. We will need additional funding to complete the development of our full product line and scale products with a demonstrated market fit. Management has plans to secure such additional funding. 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. As a result of the Company’s recurring losses from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern. 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. Practical expedients and exemptions We expensed sales commissions when incurred because the duration of the contracts for which we paid commissions were less than one year. These costs were included in the sales and marketing line item of our Statements of Operations. Currently the Company does not have any significant acquisition costs which have been incurred associated with the acquisition of its customer contracts and therefore, no deferred customer acquisition costs have been recorded. 50 We did not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we had the right to invoice for services performed. 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 December 31, 2022 2021 Computers and equipment $ 99,940 $ 767,318 Furniture 7,262 7,262 Software – 5,228 Accumulated Depreciation ( 66,121 ) ( 707,042 ) Total property and equipment, net $ 41,080 $ 72,766 Software development costs $ 6,626,049 $ 4,698,752 Accumulated amortization ( 2,491,824 ) ( 1,535,681 ) Total software development costs, net $ 4,134,225 $ 3,163,071 The Company recognized depreciation expense of $ 35,495 and $ 19,919 for the years ended December 31, 2022, and 2021, respectively related to property and equipment and amortization expense of $ 956,144 and $ 146,737 for the years ended December 31, 2022, and 2021, respectively related to software development costs. Note 3 – Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following: Schedule of accounts payable and accrued liabilities December 31, 2022 2021 Accounts payable and accrued liabilities $ 289,955 $ 210,929 Credit cards payable 6,072 12,267 Accrued interest 28,111 – Accounts payable and accrued liabilities $ 324,138 $ 223,196 Note 4 – Line of Credit On April 10, 2018, the Company entered into a line of credit with a financial institution, which was amended in July 2019 and March 2021. The principal balance was repaid in full on July 8, 2021. Interest expense for the year ended December 31, 2021 was $ 66,412 . The line of credit was collateralized by all assets of the Company, including $2 million of cash held in a control account at the lender. The Company also maintained a minimum balance at the lender to cover two months of interest payments. Prior to our IPO, the line of credit was collateralized by $6,000,000 of cash assets of two shareholders held in control accounts at the lender. 51 Following the Company’s IPO in February 2021 the line of credit was amended and the Company paid down the outstanding principal balance on its bank line of credit from $6 million to $2 million and the available principal balance for the line of credit was reduced from $6 million to $2 million. Further, the $6 million of cash collateral previously provided by the two shareholders was released. The remaining principal balance of $2 million was repaid in full and the line of credit was terminated on July 8, 2021. The shareholder who previously provided the $2 million control account had a collateral agreement with the Company which is described in Note 5. This agreement was terminated in March 2021. Note 5 – Convertible Notes Payable, Notes Payable to Related Parties and Deferred Salary and Promissory Notes Convertible notes payable During the year ended December 31, 2020, existing investors purchased $ 404,601 of our convertible notes. 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 year ended December 31, 2021, was $ 16,586 . Accrued fees to a related party The Company had an agreement with a shareholder to provide collateral for a bank line of credit described in Note 4 – Line of Credit. The amount of the cash collateral provided by the shareholder to the bank was $2.0 million. The collateral agreement required a commitment to pay collateral fees of $710,000 (comprised of annual interest of $660,000 plus the $50,000 renewal fee) to the shareholder and issue 3,454 common stock warrants. In January 2019, in connection with the collateral agreement, the Company converted accrued fees of $ 725,000 into an unsecured note payable, which bore interest at 33 % annually and had a maturity date of December 31, 2021 . The fees that accrued on the collateral arrangement were 33% percent of the collateral amount annually plus an annual renewal fee of $50,000. Interest expense for the year ended December 31, 2021, $ 208,727 . This collateral agreement terminated in March 2021. In conjunction with the February 2021 IPO, the notes payable and accrued interest due to this shareholder were converted to 1,667,859 shares of common stock. Promissory notes payable During the twelve months ended December 31, 2020, the Company issued, to a number of existing shareholders, in four separate tranches, $ 1,857,764 of Promissory Notes that accrue interest at a rate of 6 % per year and were scheduled to mature on December 31, 2021 . When issued, the notes incorporated the following attributes: interest on the Notes accrue at 6% and upon the successful completion of a qualified IPO by December 31, 2021, the notes and accrued interest would convert into equity at a per share valuation equal to $40.0 million. In addition, each investor in the Promissory Notes would receive shares and warrants based on a formula that takes into account the number of shares and warrants the investor owned before the investment in these Promissory Notes, as well as a portion of the bonus allocation of 1,038,342 shares made available to the investors. Interest expense for the year ended December 31, 2021, was $ 14,454 . 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 during the year ended December 31, 2021. 52 Note 6 – Notes Payable Notes payable to related parties and deferred salary An executive officer of the Company agreed to defer receipt of compensation to preserve liquidity in the Company. The accumulated amount of compensation owed to this executive officer was approximately $ 631,000 at December 31, 2020. The Company paid this deferred compensation in the first quarter of 2021. During 2019, the Company issued notes payable (the “Notes”) to three related parties for $ 80,000 , $ 200,000 , and $ 50,000 , respectively. The Notes did not accrue interest or have a stated maturity date. The outstanding note payable for $ 80,000 was repaid in January 2020. In December 2019, the two other note holders elected to convert their notes into convertible Notes due December 31, 2021. Two other existing investors, who were owed a total of $17,197 for services by the Company, also agreed to convert their payables into convertible Notes. During 2019 the Company issued a note payable to a related party for consulting services incurred by the Company in the amount of $ 486,198 . As of December 31, 2020, the outstanding balance for consulting services was $ 440,904 . The Company paid these Notes in the first quarter of 2021. In February 2020, the Company obtained a new $500,000 short term loan from the same related party. The Company was advanced $485,000, net of $15,000 in closing fees, and immediately placed $140,741 into an escrow account, owned and controlled by the shareholder to provide funds for the scheduled repayments. Repayment of the principal and loan financing fee occurs through weekly payments of $17,593 until the loan and financing fee is paid in full. The loan financing fee increases with the length of the payback period and was maximized at $165,000 after month five. The outstanding balance was repaid in February 2021. In November 2022, the Company entered into a Secured Bridge Note (“Note”) financing with an existing stockholder of the Company. The principal amount of the Note is $ 2,200,000 including an original issue discount of $ 200,000 . The Note bears interest at an annual rate of 10 % and matures in May 2023. The Note is secured by a lien on substantially all of the Company’s assets. At maturity, the lender has the option to convert any original issue discount and accrued but unpaid interest into shares of the Company’s common stock at a fixed conversion price of $ 1.23 per share. The conversion right is available to the lender at the earlier of (i) maturity, or (ii) payback of all the principal. In connection with the Note financing, the Company issued 300,000 common stock warrants with a five-year term and an exercise price of $ 2.10 per share. The warrants were valued at $ 361,878 , which was recorded as an additional debt discount. The Company has the option to extend the maturity date by six months to November 2023. In the event of an extension, the interest rate on the Note will increase to 20% and the Company will issue to the lender an additional 300,000 warrants. As of December 31, 2022, the balance of the Note, net of debt issuance costs, was $ 1,775,956 . Interest expense related to the Note for the year ended December 31, 2022, was $ 165,945 . Cares Act Paycheck Protection Program loan In April 2020, the Company entered into a promissory note evidencing an unsecured loan (the “First Loan”) in the amount of $ 268,662 made to the Company under the Paycheck Protection Program (the “PPP”). In January 2021, the Company entered into a second promissory note (the “Second Loan” or combined with the first loan, the “PPP Loans”) of $ 267,482 under the PPP. The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration. The First Loan was set to mature in April 2022 and the Second Loan 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. 53 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. Note 7 – Commitments and Contingencies Operating Lease In April 2021, the Company entered into a lease agreement for office space in Boulder, Colorado comprising of 8,639 square feet. The lease commenced on May 15, 2021, and terminated after 12 months. The lease had an initial base rent of $7,150 per month, with the first 15 days rent free and included three separate six month renewal options, subject to fixed rate escalation increases. In November 2022, the Company amended the lease reducing the square footage rented to 2,160 with a base rent of $4,018 per month. The amended lease terminates after 13 months. The Company previously leased approximately 3,000 square feet of office space that expired on April 30, 2021. Rent expense was $ 104,223 and $ 75,336 for the years ended December 31, 2022, and 2021, respectively. 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. Contingencies A pre-IPO investor has contacted the Company claiming damages caused by alleged acts and omissions arising from a private financing by the Company. No complaint has been filed by the investor. The alleged damages asserted by the investor are less than approximately $300,000. The Company believes it has meritorious defense to the investor's claims. Note 8 - Share-based Compensation Stock Options The following table presents the activity for stock options outstanding: Schedule of stock option activity Weighted Average Options Exercise Price Outstanding - December 31, 2020 300,353 $ 3.65 Granted 1,235,500 $ 2.79 Forfeited/canceled ( 31,062 ) $ 3.01 Exercises – – Outstanding - December 31, 2021 1,504,791 $ 2.96 Granted 683,136 $ 1.46 Forfeited/canceled ( 524,754 ) $ 2.63 Exercised – – Outstanding - December 31, 2022 1,663,173 $ 2.45 54 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 0.76 68,518 $ 2.70 $2.90 53,128 $ 2.90 4.79 53,128 $ 2.90 $4.26 171,197 $ 4.26 6.41 161,388 $ 4.26 $2.79 772,194 $ 2.79 7.90 380,299 $ 2.79 $1.79 208,750 $ 1.79 8.53 59,687 $ 1.79 $1.21 389,386 $ 1.21 9.62 194,692 $ 1.21 Total - December 31, 2022 1,663,173 $ 2.45 7.91 917,712 $ 2.65 ________________________ * Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively. During the year ended December 31, 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. Restricted Stock Units The following table presents the activity for restricted stock units outstanding: Schedule of restricted stock outstanding Weighted Restricted Stock Average Exercise Units Price Outstanding - December 31, 2020 – – Granted 424,500 – Forfeited/canceled – – Exercised – – Outstanding - December 31, 2021 424,500 – Granted 282,983 – Forfeited/canceled ( 45,381 ) – Exercised ( 98,243 ) $ 1.79 Outstanding - December 31, 2022 563,859 – During the year ended December 31, 2022, the Company granted 282,983 restricted stock units. Under terms of the restricted stock agreements, the restricted stock units are subject to certain vesting requirements. The Company recognized share-based compensation expense related to stock options and restricted stock units of $ 1,001,889 and $ 1,237,481 for the years ended December 31, 2022, and 2021, respectively. The remaining unvested share-based compensation expense of $ 1,616,569 is expected to be recognized over the next 37 months. 55 Warrants The following table presents the activity for warrants outstanding: Schedule of warrant activity Weighted Warrants Average Exercise Outstanding Price Outstanding - December 31, 2020 358,334 $ 7.02 Granted 4,909,936 $ 4.58 Forfeited/cancelled/restored – $ – Exercised ( 1,096,023 ) $ 4.52 Outstanding - December 31, 2021 4,172,247 $ 4.80 Granted 300,000 $ 2.10 Forfeited/cancelled/restored – $ – Exercised ( 148 ) $ 0.87 Outstanding - December 31, 2022 4,472,099 $ 4.62 In connection with the February 2021 IPO, the Company issued 3,991,818 warrants to purchase shares of common stock and issued to 598,772 warrants to its underwriters to cover over-allotments. The Company also issued 319,346 of representative warrants to its underwriters to purchase shares of common stock and these representative warrants contain a cashless exercise feature. During the year ended December 31, 2021, certain holders of our publicly traded Series A Warrants exercised 1,091,692 warrants for 1,091,692 million shares of common stock at the cash exercise price of $ 4.5375 per share. In addition, certain holders of our Pre-IPO warrants exercised 4,331 warrants for 2,887 shares of common stock at the net exercise price of $ 0.87 per share. During the year ended December 31, 2022, in connection with the issuance of a Secured Bridge Note, the Company issued 300,000 warrants to purchase shares of common stock at the exercise price of $ 2.10 per share. During the year ended December 31, 2022, 148 warrants were exercised using the cashless option into 112 shares of common stock. All the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 3 years as of December 31, 2022. Note 9 – Stockholders’ Equity On February 17, 2021, the Company converted its LLC membership equity units into 485,441 shares of Common Stock with a $0.001 par value. The conversion has been given retrospective treatment. Note 10 – Income Taxes For the year ended December 31, 2022 and 2021, the Company recorded no income tax benefit for the net operating losses incurred during the year, due to the uncertainty of realizing a benefit from those items. 56 The following is a reconciliation of the statutory federal income tax rate to the effective tax rate reported in the financial statements: Schedule of effective income tax rate reconciliation December 31, 2022 Income tax expense (benefit) at federal statutory rate ( 1,448,463 ) 21.00 % State and local income taxes, net of federal tax benefit ( 307,021 ) 4.45 % Prior year true-ups 39,787 - 0.58 % Other 31,442 - 0.46 % Changes in valuation allowance 1,684,255 - 24.42 % Total provision expense (benefit) for income taxes $ 0 0.00 % Significant components of the Company’s deferred taxes consisted of the following: Schedule of deferred taxes December 31, 2022 Deferred tax assets: Stock based compensation 618,691 Federal net operation losses 2,324,319 State net operation losses 397,846 Other assets 12,772 Total deferred tax assets $ 3,353,628 Less: Valuation allowance ( 2,787,033 ) Total deferred tax assets, net of valuation allowance $ 566,595 Deferred tax liabilities: Capitalized software ( 556,492 ) Property & equipment ( 10,103 ) Total deferred tax liabilities $ ( 566,595 ) Total net deferred tax asset (liability) $ – For the period ended December 31, 2022, the Company has federal and state net operating loss carryforwards of $ 11,068,185 and $ 11,068,185 , respectively. The Federal net operating loss carryforwards do not have an expiration, however, are limited to 80% of the excess of taxable income over the total Net Operating Loss Deduction, the state net operating loss carryforwards will conform to the federal provisions. Additionally, after weighting all available and positive and negative evidence for the period ended December 31, 2022, the Company has recorded a valuation allowance of $(2,787,033). The Company continuously monitors its current and prior filing positions in order to determine if any unrecognized tax positions need to be recorded. The analysis involves considerable judgement and is based on the best information available. For the period ended December 31, 2022, the Company is not aware of any positions which require an uncertain tax position liability. The Company is subject to taxation in the United States and Colorado. The statute of limitations on the initial tax return filed for 2021 tax year will expire in 2025 for federal and in 2026 for state jurisdictions. 57 Note 11 – 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 December 31, 2022, and 2021, 6,318,758 and 5,009,315 , 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 12 – Subsequent Events On February 10, 2023, the Company’s board of directors appointed Timothy J. Ackerman as the Company’s new Chief Financial Officer. In connection with Mr. Ackerman's appointment, the compensation committee of Auddia's board of directors granted Mr. Ackerman (i) an inducement stock option to purchase an aggregate of 150,200 shares of Auddia common stock, and (ii) 37,500 restricted stock units for Auddia common stock. These stock options and RSUs were agreed to and granted as an inducement material to Mr. Ackerman entering into employment with Auddia in accordance with Nasdaq Listing Rule 5635(c)(4). The RSUs and options are both subject to certain vesting requirements. 58 Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure On March 8, 2023, we were advised by Daszkal Bolton, LLP (“Daszkal”), the Company’s independent registered public accounting firm, that Daszkal completed a business combination agreement with CohnReznick LLP (“CohnReznick”). As a result of this transaction, Daszkal will resign as the Company’s independent registered public accounting firm following the filing of this Annual Report. The Company’s current Daszkal audit team is now part of CohnReznick and the Company expects it will likely engage CohnReznick to serve as the Company’s independent registered public accounting firm for the Company’s fiscal year ending December 31, 2023 but has not engaged them at this time. Daszkal’s reports on the Company’ financial statements for the past two years did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the years ended December 31, 2022 and 2021, there were (i) no disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and Daszkal on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Daszkal’s satisfaction, would have caused Daszkal to make reference thereto in its reports on the financial statements for such years; and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S-K, except that Daszkal advised the Company of material weaknesses in its internal control over financial reporting as of December 31, 2021 and 2020.