AUDDIA INC. 10-Q

Item 1. Financial Statements Auddia Inc. Condensed Balance Sheets September 30, 2023 December 31, 2022 ASSETS (Unaudited) (Audited) Current assets: Cash $ 2,199,678 $ 1,661,434 Accounts receivable, net 574 137 Prepaid insurance 56,704 — Total current assets 2,256,956 1,661,571 Non-current assets: Property and equipment, net of accumulated depreciation 22,084 41,080 Software development costs, net of accumulated amortization 3,545,610 4,134,225 Deferred offering costs 170,259 222,896 Prepaids and other non-current assets 47,364 51,754 Total non-current assets 3,785,317 4,449,955 Total assets $ 6,042,273 $ 6,111,526 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 587,641 $ 324,138 Notes payable to related party, net of debt issuance costs 2,993,639 1,775,956 Stock awards liability 45,981 161,349 Total current liabilities 3,627,261 2,261,443 Total liabilities 3,627,261 2,261,443 Commitments and contingencies (Note 5) – – 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 19,947,223 and 12,654,949 shares issued and outstanding September 30, 2023 and December 31, 2022 19,947 12,654 Additional paid-in capital 80,725,555 75,573,263 Accumulated deficit ( 78,330,490 ) ( 71,735,834 ) Total shareholders' equity 2,415,012 3,850,083 Total liabilities and shareholders' equity $ 6,042,273 $ 6,111,526 The accompanying notes are an integral part of these unaudited condensed financial statements. 4 Auddia Inc. Condensed Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Revenue $ – $ – $ – $ – Operating expenses: Direct cost of services 43,470 32,712 130,809 128,806 Sales and marketing 316,297 298,924 765,176 1,396,010 Research and development 227,133 181,596 617,622 481,611 General and administrative 777,496 540,220 2,596,831 2,400,503 Depreciation and amortization 465,166 274,839 1,350,820 721,971 Total operating expenses 1,829,562 1,328,291 5,461,258 5,128,901 Loss from operations ( 1,829,562 ) ( 1,328,291 ) ( 5,461,258 ) ( 5,128,901 ) Other (expense) income: Interest expense ( 286,920 ) ( 2,023 ) ( 1,133,398 ) ( 5,058 ) Total other expense ( 286,920 ) ( 2,023 ) ( 1,133,398 ) ( 5,058 ) Loss before income taxes ( 2,116,482 ) ( 1,330,314 ) ( 6,594,656 ) ( 5,133,959 ) Provision for income taxes – – – – Net loss $ ( 2,116,482 ) $ ( 1,330,314 ) $ ( 6,594,656 ) $ ( 5,133,959 ) Net loss per share attributable to common stockholders Basic and diluted $ ( 0.11 ) $ ( 0.11 ) $ ( 0.41 ) $ ( 0.41 ) Weighted average common shares outstanding Basic and diluted 19,947,223 12,514,763 16,043,086 12,498,206 The accompanying notes are an integral part of these unaudited condensed financial statements. 5 Auddia Inc. Condensed Statements of Changes in Shareholders’ Equity (Unaudited) For The Three and Nine Months Ended September 30, 2023 Common Stock Number of Shares Par Value Additional Paid-In-Capital Accumulated Deficit Total Balance, January 1, 2023 12,654,949 $ 12,654 $ 75,573,262 $ ( 71,735,834 ) $ 3,850,083 Exercise of Restricted Stock Units 195,760 196 42,601 – 42,797 Share-based compensation – – 357,680 – 357,680 Net loss – – – ( 2,155,312 ) ( 2,155,312 ) Balance, March 31, 2023 12,850,709 $ 12,850 $ 75,973,543 $ ( 73,891,146 ) $ 2,095,247 Issuance of common shares, net of costs 7,096,514 7,097 3,956,787 – 3,963,884 Exercise of Restricted Stock Units – – ( 42,797 ) – ( 42,797 ) Issuance of warrants – – 383,004 – 383,004 Share-based compensation – – 224,856 – 224,856 Revaluation of share-based compensation liability – – 30,445 – 30,445 Net loss – – – ( 2,322,862 ) ( 2,322,862 ) Balance, June 30, 2023 19,947,223 $ 19,947 $ 80,525,838 $ ( 76,214,008 ) $ 4,331,777 Share-based compensation – – 217,141 – 217,141 Revaluation of share-based compensation liability – – ( 17,424 ) – ( 17,424 ) Net loss – – – ( 2,116,482 ) ( 2,116,482 ) Balance, September 30, 2023 $ 19,947,223 $ 19,947 $ 80,725,555 $ ( 78,330,490 ) $ 2,415,012 For The Three and Nine Months Ended September 30, 2022 Common Stock Number of Shares Par Value Additional Paid-In-Capital Accumulated Deficit Total Balance, January 1, 2022 12,416,408 $ 12,416 $ 74,236,910 $ ( 64,838,389 ) $ 9,410,937 Exercise of Restricted Stock Units 98,355 98 ( 98 ) – – Share-based compensation – – 385,908 – 385,908 Reclassification of share-based compensation liability – – ( 128,534 ) – ( 128,534 ) Net loss – – – ( 1,753,258 ) ( 1,753,258 ) Balance, March 31, 2022 12,514,763 $ 12,514 $ 74,494,186 $ ( 66,591,647 ) $ 7,915,053 Share-based compensation – – 285,921 – 285,921 Reclassification of share-based compensation liability – – ( 7,262 ) – ( 7,262 ) Net loss – – – ( 2,050,385 ) ( 2,050,385 ) Balance, June 30, 2022 12,514,763 $ 12,514 $ 74,772,845 $ ( 68,642,032 ) $ 6,143,327 Share-based compensation – – 26,657 – 26,657 Revaluation of share-based compensation liability – – ( 72,315 ) – ( 72,315 ) Net loss – – – ( 1,330,314 ) ( 1,330,314 ) 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. 6 Auddia Inc. Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 6,594,656 ) $ ( 5,133,959 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Finance charge associated with debt issuance cost 850,688 – Depreciation and amortization 1,350,820 721,971 Share-based compensation expense 799,677 698,486 Change in assets and liabilities: Accounts receivable ( 437 ) 52 Prepaid insurance ( 56,705 ) – Prepaids and other non-current assets 4,390 ( 1,065 ) Accounts payable and accrued liabilities 241,269 92,403 Net cash used in operating activities ( 3,404,954 ) ( 3,622,112 ) Cash flows from investing activities: Software capitalization ( 743,208 ) ( 1,673,517 ) Purchase of property and equipment – ( 3,809 ) Net cash used in investing activities ( 743,208 ) ( 1,677,326 ) Cash flows from financing activities: Net settlement of share-based compensation liability ( 80,115 ) ( 88,723 ) Proceeds from related party debt 750,000 – Proceeds from issuance of common shares 4,016,521 – Net cash provided by (used in) financing activities 4,686,406 ( 88,723 ) Net increase in cash 538,244 ( 5,388,161 ) Cash, beginning of year 1,661,434 6,345,291 Cash and restricted cash, end of period $ 2,199,678 $ 957,130 Supplemental disclosures of cash flow information: Cash paid for Interest $ 6,000 $ 5,058 Supplemental disclosures of non-cash activity: Reclassification of deferred offering cost $ 52,637 $ – Original issue discount and issuance of warrants on related party debt $ 458,004 $ – The accompanying notes are an integral part of these unaudited condensed financial statements. 7 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., (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. The Company is incorporated in Delaware and headquartered in Colorado. Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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. The condensed balance sheet as of December 31, 2022 has been derived from the financial statements included in the Company’s annual report on Form 10-K. 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. The Company recorded all adjustments necessary for a fair statement of the results for the interim period and all such adjustments are of a normal recurring nature. 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 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. 8 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. 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 to comply with certain new or revised accounting standards that have different effective dates for public and private companies. Going Concern The Company had cash of $ 2,199,678 as of September 30, 2023. The Company will need additional funding to complete the development of the full product line and scale products with a demonstrated market fit. Management has plans to secure such additional funding. If the Company is unable to raise capital when needed or on acceptable terms, the Company will be forced to delay, reduce, or eliminate 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 within one year after the date the financial statements are issued. Management has plans to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, such as the White Lion equity line of credit (refer to Note 8) and additional future financing agreements. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s current level of cash is not sufficient to execute the business plan. For the foreseeable future, the Company will incur significant operating expenses, capital expenditures and working capital funding that will deplete cash on hand by February 2024. 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 as of September 30, 2023 or December 31, 2022. 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. As of September 30, 2023, the Company had approximately $ 1.9 million in excess of federally insured limits. As of December 31, 2022, the Company had approximately $ 1.4 million 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. 9 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 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 considered impaired and expensed during the period of such determination. We determined that no such impairments were required during the three months and nine months ended September 30, 2023. Software development costs of $ 213,705 and $ 394,893 were capitalized for the three months ended September 30, 2023, and 2022, respectively and $ 743,208 and $ 1,673,517 were capitalized for the nine months ended September 30, 2023 and 2022, respectively. Amortization of capitalized software development costs were $ 458,973 and $ 262,703 for the three months ended September 30, 2023, and 2022, respectively and $ 1,331,823 and $ 693,441 for the nine months ended September 30, 2023 and 2022, respectively and are included in depreciation and amortization expense in the Company’s condensed statement of operations. 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 excludes any sales incentives and amounts collected on behalf of third parties. The Company will recognize revenue when a performance obligation is satisfied by transferring control over a service or product to a customer. The Company 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 the condensed statements of operations. Collected taxes 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 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 would be recorded as deferred revenue. The deferred revenue will be recognized as revenue in the 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 share-based compensation 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. 10 Recently Adopted ASUs ASU 2016-13-Financial Instruments-Credit Losses- The new guidance makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. Specifically, the new CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, that considers forecasts of future economic conditions in addition to information about past events and current conditions. The Company adopted the new standard beginning January 1, 2023. The adoption of the new standard did not have a material impact on the Company’s financial statements. 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, 2023 December 31, 2022 Computers and equipment $ 99,939 $ 99,939 Furniture 7,263 7,262 Accumulated depreciation ( 85,118 ) ( 66,121 ) Total property and equipment, net $ 22,084 $ 41,080 Software development costs $ 7,369,257 $ 6,626,049 Accumulated amortization ( 3,823,647 ) ( 2,491,824 ) Total software development costs, net $ 3,545,610 $ 4,134,225 The Company recognized depreciation expense of $ 6,193 and $ 12,136 for the three months ended September 30, 2023, and 2022, respectively related to property and equipment and amortization expense of $ 458,973 and $ 262,703 for the three months ended September 30, 2023, and 2022, respectively related to software development costs. The Company recognized depreciation expense of $ 18,997 and $ 28,529 for the nine months ended September 30, 2023, and 2022, respectively related to property and equipment and amortization expense of $ 1,331,823 and $ 693,441 for the nine months ended September 30, 2023, and 2022, 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 September 30, 2023 December 31, 2022 Accounts payable and accrued liabilities $ 269,159 $ 289,955 Credit cards payable 14,517 6,072 Accrued interest 303,965 28,111 Total accounts payable and accrued liabilities $ 587,641 $ 324,138 11 Note 4 – Notes Payable to Related Party, net of debt issuance costs In November 2022, the Company entered into a Secured Bridge Note (the “Prior Note”) financing with an existing shareholder of the Company. The principal amount of the Prior Note was $ 2,200,000 including an original issue discount of $ 200,000 . The Prior Note bears interest at a stated rate of 10% and had an original maturity date of May of 2023. The Prior Note is secured by a lien on substantially all of the Company’s assets. At maturity, the lender had 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 Prior 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. During May of 2023, the Company extended the maturity date by six months to November 2023 at an increased annual interest rate of 20% and the issuance of an additional 300,000 warrants. The additional warrants were valued at $ 94,083 , which was also recorded as an additional debt discount. The embedded conversion option was not accounted for separately as, in accordance with the guidance outlined in ASC 815-40, it was considered indexed to the Company’s shares. Similarly, the issued warrants were classified in equity as they were also considered indexed to the Company’s shares in accordance with ASC 815-40. In connection with an additional financing with the same related party during April of 2023, the Company cancelled the original 300,000 warrants issued with the Prior Note and issued 600,000 new common stock warrants with a five-year term and an exercise price of $0.61 per share. The Company recognized the modification in accordance with ASC 815-40-35, which resulted in the recognition of additional debt discount in the amount of $ 35,981 . Upon issue of the new common stock warrants, 300,000 were fully vested and immediately exercisable upon issue. The remaining 300,000 warrants were unvested. During May of 2023, the Company extended the maturity date of the Prior Notes by six months to November 2023 at an increased annual interest rate of 20%. In connection with this extension, the 300,000 outstanding unvested warrants became vested and exercisable. As of September 30, 2023, and December 31, 2022, the balance of the Prior Note, net of debt issuance costs, was $2,168,639 and $1,775,956, respectively. Interest expense related to the Prior Note for the three and nine months ended September 30, 2023, was $157,298 and $762,112. As noted above, the Company entered into an additional Secured Bridge Note (“New Note”) financing with the same accredited investor and significant existing shareholder during April of 2023. In addition, the Company also amended the terms of the Prior Note. The principal amount of the New Note is $ 825,000 including an original issue discount of $ 75,000 . The New Note bears interest at an annual stated rate of 10% with an original maturity date of July 2023. The New 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 $0.61 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 New Note financing, the Company issued 325,000 common stock warrants with a five-year term and an exercise price of $0.61 per share and an additional 325,000 common stock warrants with a five-year term and an exercise price of $0.61 per share that are exercisable in the event that the loan term is extended. The warrants were valued at $ 252,940 , which was recorded as additional debt discount. Similar to the accounting for the Prior Note, the embedded conversion option was not accounted for separately as, in accordance with the guidance outlined in ASC 815-40, it was considered indexed to the Company’s shares. In addition, the issued warrants were classified in equity as they were also considered indexed to the Company’s shares in accordance with ASC 815-40. As of September 30, 2023, the balance of the New Note issued in April 2023, net of debt issuance costs, was $ 825,000 . Interest expense related to the New Note for the three and nine months ended September 30, 2023 was $ 401,441 , respectively. On July 31, 2023, the Company extended the maturity date of the New Note to November 30, 2023. In connection with such extension, 325,000 outstanding unvested warrants became vested and exercisable. 12 Note 5 – Commitments and Contingencies Operating Lease In April 2021, the Company entered into a lease agreement for office space in Boulder, Colorado comprising 8,639 square feet. The lease commenced on May 15, 2021, and terminated after 12 months. The Company subsequently extended the lease through November 2022. 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. Rent expense, as part of general and administrative expenses as included in the Condensed Statement of Operations, was $ 12,053 and $ 39,935 for the three months ended September 30, 2023, and 2022, respectively and $ 49,491 and $ 83,117 for the nine months ended September 30, 2023, and 2022, 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. There are no active litigations as of the date the financial statements were issued. However, 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 outcome of the complaint was neither probable or estimable as of the date the financial statements were issued. NASDAQ Deficiencies On May 23, 2023, we received a letter (the “Notice”) from the Listing Qualifications Staff of the Nasdaq Stock Market, LLC (“Nasdaq”) indicating that, based upon the Company’s reported stockholder’s equity of $ 2,095,247 at the end of March 31, 2023, we are not in compliance with the requirement to maintain a minimum stockholder’s equity of $2,500,000 for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(b)(1) the “Stockholders’ Equity Requirement”). We were provided a compliance period of 45 calendar days from the date of the Notice, or until July 7, 2023, to submit a plan to regain compliance with the Stockholder’s Equity Requirement, pursuant to Nasdaq Listing Rule 5810(c)(2)(A). On July 10, 2023, the Company received a letter from Nasdaq advising that the Company had been granted an extension to file a Form 10-Q for the quarter-ended June 30, 2023 evidencing compliance with Stockholder’s Equity Requirement. The stockholder’s equity balance as of June 30, 2023 was $ 4,331,777 , which is $1,831,778 over the $2.5 million Stockholders’ Equity Requirement. On August 25, 2023, Nasdaq confirmed that the Company had regained compliance with the Stockholders’ Equity Requirement and that this matter is now closed. Separately, on April 24, 2023 we received a letter from Nasdaq indicating that the Company is not in compliance with the $1.00 Minimum Bid Price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market (the “Bid Price Requirement”). The letter indicated that the Company will be provided 180 calendar days (or until October 23, 2023) in which to regain compliance. If at any time during this 180 calendar day period the bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of ten consecutive business days, Nasdaq will provide the Company with a written confirmation of compliance and the matter will be closed. On October 24, 2023, the Company received a written notice from the Nasdaq staff indicating that the Company had not regained compliance with the Bid Price Requirement and was not eligible for an additional 180 calendar day compliance period. As a result, the staff determined to delist the Company’s Common Stock from Nasdaq, unless the Company timely requests an appeal of the Staff’s determination to a Hearings Panel (the “Panel”), pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series. The Company has requested a hearing before the Panel to appeal the October notice and to address compliance with the Bid Price Requirement. While the appeal process is pending, the suspension of trading of the Company’s common stock, will be stayed and the Common Stock will continue to trade on Nasdaq until the hearing process concludes and the Panel issues a written decision. The hearing is expected to occur in mid-January 2024. 13 The Company intends to consider all options to regain and maintain compliance with all Nasdaq continued listing requirements. The Company’s receipt of these Nasdaq letters does not affect the Company’s business, operations or reporting requirements with the Securities and Exchange Commission. Note 6 - Share-based Issuances Stock Options The following table presents the activity for stock options outstanding: Schedule of stock option activity Options Weighted Average Exercise Price Outstanding - December 31, 2022 1,663,173 $ 2.45 Granted 200,200 0.94 Forfeited/canceled ( 206,454 ) 1.51 Exercised – – Outstanding - September 30, 2023 1,656,919 $ 2.38 The following table presents the composition of options outstanding and exercisable: Schedule of options outstanding and exercisable Options Outstanding Options Exercisable Exercise Prices Number Price Life* Number Price* $2.70 22,264 $ 2.70 0.75 22,264 $ 2.70 $2.90 53,128 $ 2.90 4.11 53,128 $ 2.90 $4.26 171,197 $ 4.26 5.73 171,197 $ 4.26 $2.79 772,194 $ 2.79 7.23 553,122 $ 2.79 $1.79 198,750 $ 1.79 7.87 68,437 $ 1.79 $1.21 389,386 $ 1.21 8.95 292,039 $ 1.21 $0.40 50,000 $ 0.40 9.69 – $ 0.40 Total - September 30, 2023 1,656,919 $ 2.38 1,160,187 $ 2.59 * Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively. During the nine months ended September 30, 2023, the Company granted 200,200 stock options. 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. 14 Restricted Stock Units The following table presents the activity for restricted stock units outstanding: Schedule of restricted stock units outstanding Restricted Stock Units Weighted Average Grant Date Fair Value Outstanding - December 31, 2022 563,859 $ 2.14 Granted 37,500 1.24 Forfeited/canceled ( 118,350 ) 1.83 Vested/issued ( 195,759 ) 1.83 Outstanding - September 30, 2023 287,250 $ 2.37 During the nine months ended September 30, 2023, the Company granted 37,500 restricted stock units. Under terms of the restricted stock agreement, the restricted stock units are subject to a certain vesting schedule. In 2023, 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 recorded the expected value of these share-based awards as a liability. The Company recognized a share-based compensation liability as of September 30, 2023, of $ 45,981 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 of $ 799,677 and $ 698,486 for the nine months ended September 30, 2023, and 2022, respectively. The remaining unvested share-based compensation expense of $ 1,447,278 is expected to be recognized over the next 90 months. Warrants The following table presents the activity for warrants outstanding: Schedule of warrant outstanding Warrants Weighted Average Exercise Price Outstanding - December 31, 2022 4,472,099 $ 4.62 Granted 950,000 0.61 Forfeited/canceled – – Exercised – – Outstanding - September 30, 2023 5,422,099 $ 3.84 5,422,099 of the outstanding warrants are currently exercisable and have a weighted average remaining contractual life of approximately 2.69 years as of September 30, 2023. 15 Note 7 – 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 shareholder’s stock outstanding during the period. For the calculation of diluted net loss per share, net loss per share attributable to common shareholders 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, 2023, and 2022, 7,079,016 shares and 6,271,219 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 8 – Equity Financings Equity Line Sales of Common Stock On November 14, 2022, the Company entered into a Common Stock Purchase Agreement (the “White Lion Purchase Agreement”) with White Lion Capital, LLC, a Nevada limited liability company (“White Lion”) for an equity line facility. In April and June 2023, the Company closed on three sales of Common Stock under the White Lion Purchase Agreement. As a result, the Company issued an aggregate of 2,361,514 common shares and received aggregate proceeds of approximately $ 1.3 million . Any proceeds that the Company receives under the White Lion Purchase Agreement are expected to be used for working capital and general corporate purposes. The aggregate number of shares of common stock that the Company can sell to White Lion under the White Lion Purchase Agreement (including the Commitment Shares) may in no case exceed 2,501,700 shares of the common stock (which is equal to approximately 19.99% of the shares of the common stock outstanding immediately prior to the execution of the White Lion Purchase Agreement) (the “Exchange Cap”), unless shareholder approval is obtained to issue purchase shares above the Exchange Cap, in which case the Exchange Cap will no longer apply. The Company recognized all offering costs related to the equity line of credit as deferred offering costs in accordance with the guidance in ASC 835-30-S45. Sale of Common Shares (S-3 offering) In June 2023, the Company sold 4,735,000 shares of common stock in a registered public offering with net proceeds of $ 2.7 million . Note 9 – Subsequent Events Replacement Equity Line with White Lion On November 6, 2023, the Company entered into a new Common Stock Purchase Agreement and a related registration rights agreement with White Lion. Pursuant to the new Common Stock Purchase Agreement, the Company has the right, but not the obligation to require White Lion to purchase, from time to time until December 31, 2024, up to $10,000,000 in aggregate gross purchase price of newly issued shares of the Company’s common stock, subject to certain limitations and conditions set forth in the Common Stock Purchase Agreement. In connection with the new Common Stock Purchase Agreement, the parties agreed to terminate the previous Common Stock Purchase Agreement with White Lion. 16