Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the
following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial statements
(prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and related notes
included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”). The following discussion contains forward-looking
statements that are subject to risks and uncertainties. See “ Special Note Regarding Forward-Looking Statements ” for a discussion
of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed
in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form
10-K, particularly in the section entitled “ Risk Factors .” Unless we state otherwise or the context otherwise requires, the
terms “we,” “us,” “our” and the “Company” refer Auddia Inc. and its subsidiaries.
Overview
Auddia is a technology
company headquartered in Boulder, CO that is reinventing how consumers engage with audio through the development of a proprietary AI platform
for audio and innovative technologies for podcasts. Auddia is leveraging these technologies within its industry-first audio Superapp,
faidr (previously known as the Auddia App).
faidr gives consumers
the opportunity to listen to any AM/FM radio station with commercial breaks replaced with personalized audio content, including popular
and new music, news, and weather. The faidr app represents the first-time consumers can combine the local content uniquely provided by
AM/FM radio with commercial-free and personalized listening many consumers demand from digital-media consumption. In addition to commercial-free
AM/FM, faidr includes podcasts – also with ads removed or easily skipped by listeners – as well as exclusive content, branded
faidrRadio, which includes new artist discovery, curated music stations, and Music Casts. Music Casts are unique to faidr. Hosts and DJs
can combine on-demand talk segments with dynamic music streaming, which allows users to hear podcasts with full music track plays embedded
in the episodes.
Auddia has also developed
a differentiated podcasting capability with ad-skipping features and also 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, and monetize their content with
new content distribution channels. This podcasting feature also gives users the ability to go deeper into the stories through supplemental,
digital content, and eventually comment and contribute their own content to episode feeds.
The combination of AM/FM streaming and podcasting,
with Auddia’s unique, technology-driven differentiators, addresses large and rapidly growing audiences.
The Company has developed
its AI platform on top of Google’s TensorFlow open-source library that is being “taught” to know the difference between
all types of audio content on the radio. For instance, the platform recognizes the difference between a commercial and a song and is learning
the differences between all other content to include weather reports, traffic, news, sports, DJ conversation, etc. Not only does the technology
learn the differences between the various types of audio segments, but it also identifies the beginning and end of each piece of content.
The Company is leveraging
this technology platform within its premium AM/FM radio listening experience through the faidr App. The faidr App is intended to be downloaded
by consumers who will pay a subscription fee in order to listen to any streaming AM/FM radio station and podcasts, all with commercial
interruptions removed from the listening experience, in addition to the faidrRadio exclusive content offerings. Advanced features will
allow consumers to skip any content heard on the station and request request audio content on-demand. We believe the faidr App represents
a significant differentiated audio streaming product, or Superapp, 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 ad-free AM/FM streaming and ad-free podcasts, the faidr App is intended to deliver non-music content that includes
local sports, news, weather, traffic and the discovery of new music alongside exclusive programming. No other radio streaming app available
today, including category leaders like TuneIn, iHeart, and Audacy, can compete with faidr’s full product offerings.
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The Company launched
an MVP version of faidr through several consumer trials in 2021 to measure consumer interest and engagement with the App. The full app
launched on February 15, 2022, and included all major U.S. radio stations in the US. In February 2023, we added faidrRadio, our exclusive
content offerings, to the app. Podcasts (standard) were added to the app for the iOS version before the end of Q1 2023 as planned and
added to the Android app in May of 2023. Podcast functionality will continue to be enhanced through 2024, including the deployment of
the Company’s ad-reduction technology.
The Company also developed
a testbed differentiated podcasting capability called Vodacast, which leveraged technologies and proven product concepts to differentiate
its podcasts offering from other competitors in the radio-streaming product category.
With podcasting growing and predicted to grow
at a rapid rate, the Vodacast podcast platform was conceptualized to fill a void in the emerging audio media space. The platform was built
to become the preferred podcasting solution for podcasters by enabling them to deliver digital content feeds that match the audio of their
podcast episodes, and by enabling podcasters to make additional revenue from new digital advertising channels, subscription channels,
on-demand fees for exclusive content, and through direct donations from their listeners. Throughout 2023, Auddia has been migrating their
podcasting capabilities into the flagship faidr app with the intention to sunset the Vodacast platform and instead bring the advanced
podcasting functionality that was found on Vodacast into faidr as part of the overall strategy to build a single audio Superapp. This
includes Auddia’s new podcast ad-reduction technology.
Today, podcasters do not have a preference as
to where their listeners access their episodes, as virtually all listening options (mobile apps and web players) deliver only their podcast
audio. By creating significant differentiation on which they can make net new and higher margin revenue, we believe that podcasters will
promote faidr to their listeners, thus creating a powerful, organic marketing dynamic.
One innovative and proprietary part of Auddia’s
podcast capabilities, originally presented on their Vodacast differentiated podcasting capability, is the availability of tools to create
and distribute an interactive digital feed, which supplements podcast episode audio with additional digital. These content feeds allow
podcasters to tell deeper stories to their listeners while giving podcasters access to digital revenue for the first time. Podcasters
will be able to build these interactive feeds using The Podcast Hub, a content management system that was originally developed and trialed
as part of Auddia’s Vodacast platform, which 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, relevant-to-the-story, 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 will appear fully synchronized in the faidr mobile App, and it
also can be hosted and accessed independently (e.g., through any browser), making the content feed universally distributable.
Over time, users will be able to comment, and
podcasters will be able to grant some users publishing rights to add content directly into the feed on their behalf. This will create
another first for podcasting, a dialog between creator and fan, synchronized to the episode content. The interactive feed for podcasts
has been developed and tested on Vodacast and is expected to be another differentiator added into faidr for podcast listeners later in
2024.
The podcast capabilities within faidr 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. “Flex Revenue”
and the initial inclusion of the new revenue channels that come with it will be added to podcasting in the faidr app, and the first elements
of this new monetization capability is expected to be commercially available in 2024, beginning with subscription plans to access ad-reduction
in podcasts.
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The faidr mobile App
is available today through the iOS and Android App stores.
We have funded our operations
with proceeds from the February 2021 IPO, Series A warrants exercised in July 2021 and common share issuance during June of 2023. We also
obtained debt financing through a related party during November 2022 and April 2023. In addition, we sold common shares during April 2023
and June 2023 pursuant to our equity line facility. Since its inception, we have incurred significant operating losses. Since inception
we have incurred significant operating losses. As of December 31, 2023, we had an accumulated deficit of $80,517,841. Our ability to generate
product revenue sufficient to achieve profitability will depend heavily on the successful development and commercialization of one or
more of our Apps. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities,
particularly if and as we:
·
nationally launch our faidr App and as we continue training our proprietary AI technology and make product enhancements;
·
continue to develop and expand our technology and functionality to advance the faidr app;
·
rollout our product on a national basis, which will include increasing our sales and marketing costs related to the promotion of our products. faidr promotion will include a combination of a) purchasing ads directly from broadcasters or b) participating broadcasters to promote without purchasing ads, but sharing a portion of subscription proceeds based on listening activity on those stations;
·
continue to pursue and complete potential acquisitions of other companies;
·
hire additional business development, product management, operational and marketing personnel;
·
continue market studies of our products; and
·
add operational and general administrative personnel which will support our product development programs, commercialization efforts and our transition to operating as a public company.
As a result, we will
need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate
significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other
capital sources, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional
funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter
into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization
of one or more of our product candidates.
Because of the numerous
risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when
or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable.
If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations
at planned levels and be forced to reduce or terminate our operations.
As of December 31, 2023,
we had cash of $804,556. The Company secured approximately $3.6 million in additional financing in February and March 2024. The Company
had approximately $2.8 million in cash and approximately $4M million in debt due at March 31, 2024 and the Company is actively working
to refinance the existing debt and raise additional capital, but cannot be certain of the outcome and timing. 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. However, 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.
To accelerate
user acquisition, revenue, and cash flow, the Company has explored numerous potential acquisition targets of AM/FM streaming aggregators
over the past year and a half and continues to explore new opportunities. At present, the Company is in advanced active discussions with
two potential targets and seeking to execute one or more agreements in the near term. These business development transactions would require
additional funding.
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Recent Developments
Mergers and Acquisitions Strategy
We are exploring various merger and acquisition
options as part of a broader strategy which aims to scale the business more rapidly; accelerate user adoption and subscriber growth; enter
new markets (international); and open new pathways toward raising capital. The overall strategy focuses on three areas: (1) acquiring
retained users of a radio-streaming app, (2) bringing our proprietary ad-free products to that userbase to generate significant subscription
revenue, and (3) bringing together other differentiated features into the larger audio Superapp platform.
RFM Acquisition
On January 26, 2024, we entered into a Purchase
Agreement (the “RFM Purchase Agreement”), pursuant to which we agreed to acquire RadioFM (the “RFM Acquisition”),
which is currently a component of both AppSmartz and RadioFM (partnerships under common control). The aggregate consideration for the
RFM Acquisition is $13,000,000 (plus $2,000,000 in contingent consideration if certain post-close milestones are reached), in addition
to the assumption of certain liabilities, as may be adjusted pursuant to the terms of the RFM Purchase Agreement.
In March 2024, the parties mutually agreed to
terminate the RFM Purchase Agreement.
Nasdaq Deficiency Notices
The Nasdaq listing rules require listed securities
to maintain a minimum bid price of $1.00 per share. As previously reported in our Current Report on Form 8-K filed on November 28, 2023,
we received a written notice from Nasdaq indicating that the Company was not in compliance with the $1.00 minimum bid price requirement
set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing. As a result, the Nasdaq 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. Our hearing with the Panel occurred on January 18, 2024.
On November 21, 2023,
we received a written notice from Nasdaq indicating that we are not in compliance with Nasdaq Listing Rule 5550(b)(1), which requires
companies listed on The Nasdaq Capital Market to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing
(the “Stockholders’ Equity Requirement”). In our quarterly report on Form 10-Q for the period ended September 30, 2023,
we reported stockholders’ equity of $2,415,012, and, as a result, did not satisfy Listing Rule 5550(b)(1). Nasdaq’s November
written notice had no immediate impact on the listing of our common stock. Our hearing with the Panel occurred on January 18, 2024
and addressed all outstanding listing compliance matters, including compliance with the Stockholders’ Equity Notice as well as compliance
with the Bid Price Requirement.
On January 30, 2024, the Panel granted the Company’s
request for an exception to Nasdaq’s listing rules until April 22, 2024, to demonstrate compliance with all applicable continued
listing requirements for the Nasdaq Capital Market.
On March 20, 2024, we received a letter from Nasdaq stating we had
regained compliance with the minimum bid requirement. The Panel reminded us that although we regained compliance with the minimum bid
requirement, we are also required to regain compliance with the equity requirement. Therefore, this matter will remain open until we demonstrate
compliance with all requirements.
We intend to consider
all options to regain and maintain compliance with all Nasdaq continued listing requirements.
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Reverse
Share Split
The Company filed an amendment to its Certificate
of Incorporation with the Secretary of State in Delaware which became effective as of 5:00 P.M. Eastern Time on February 26, 2024. As
a result, every twenty-five (25) issued shares of common stock were automatically combined into one share of common stock.
Shares of the Company’s common stock were
assigned a new CUSIP number (05072K 206) and began trading on a split-adjusted basis on February 27, 2024.
The reverse stock split did not change the authorized
number of shares of the Company’s common stock. No fractional shares were issued and any fractional shares resulting from the reverse
stock split were rounded up to the nearest whole share. Therefore, stockholders with less than 25 shares received one share of stock.
The reverse stock split applied to the Company’s outstanding
warrants, stock options and restricted stock units. The number of shares of common stock into which these outstanding securities are convertible
or exercisable were adjusted proportionately as a result of the reverse stock split. The exercise prices of any outstanding warrants or
stock options were also proportionately adjusted in accordance with the terms of those securities and the Company’s equity incentive
plans.
Impact of Inflation
We have recently experienced higher costs across
our business as a result of inflation, including higher costs related to employee compensation and outside services. We expect inflation
to continue to have a negative impact into 2024, and it is uncertain whether we will be able to offset the impact of inflationary pressures
in the near term.
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 podcasting 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 release
new upgrades and enhancements within our Apps and look to generate revenue 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 our management of three years. Costs associated
with significant upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an
ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies. Unamortized capitalized
software development costs determined to be in excess of anticipated future net revenues are impaired and expensed during the period of
such determination. We expect to continue to incur research and development expenses and capitalization in the future as we continue to
develop and enhance our faidr and podcasting Apps.
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General and administrative
Our general and administrative
expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and professional
fees related to auditing, tax, general legal services, and consulting services. We expect our general and administrative expenses to continue
to increase in the future as we right-size 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
The other income and
expense category primarily consists of interest expense attributed to the debt and conversion features of the Notes payable to related
party.
Results of operations
Comparison of the Years ended December
31, 2023, and 2022
The
following table summarizes our results of operations:
Year Ended
December 31, 2023
December 31, 2022
Change $
Revenue
$
–
$
–
–
Operating expenses:
Direct cost of services
181,679
180,690
989
Sales and marketing
1,096,106
1,673,692
(577,586 )
Research and development
781,017
654,879
126,138
General and administrative
3,576,729
3,223,520
353,209
Depreciation and amortization
1,840,837
991,639
849,198
Total operating expenses
7,476,368
6,724,420
751,948
Loss from operations
(7,476,368 )
(6,724,420 )
(751,948 )
Other (expense) income:
Interest expense
(1,331,128 )
(173,027 )
(1,158,101 )
Interest income
–
1
(1 )
Total other expense
(1,331,128 )
(173,026 )
(1,158,102 )
Loss before income taxes
(8,807,4958 )
(6,897,446 )
(1,910,049 )
Provision for income taxes
–
–
Net loss
$ (8,807,495 )
$ (6,897,446 )
(1,910,049 )
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Revenue
Total revenues for the
years ended December 31, 2023, and 2022 were $0 as we continue to develop and enhance our faidr and podcasting Apps to establish new revenue
streams.
Direct Cost of
Services
Direct Cost of Services
increased by $989 or 0.5% to $181,679 for the year ended December 31, 2023, compared to $180,690 for the year ended December 31, 2022.
This remained relatively flat due to ongoing cost of services to maintain the faidr app.
Sales and marketing
Sales and marketing expenses
decreased by $577,586 or 34.5% to $1,096,106 for the year ended December 31, 2023 compared to $1,673,692 for the year ended December 31,
2022. The decrease in sales and marketing expenses as of December 31, 2023 compared to December 31, 2022 was primarily attributed to reduced
marketing promotion costs associated with the national launch of the faidr app. We expect our sales and marketing expenses to fluctuate
period by period as we release new upgrades and enhancements within our Apps and look to generate revenue through customer acquisition,
retention, and subscription conversion.
Research and development
Research and development
expenses increased by $126,138 or 19.3% to $781,017 for the year ended December 31, 2023 from $654,879 for the year ended December 31,
2022 primarily due to a reduction in the level of capitalized software expenses. We are continually
developing enhancements to both our faidr and podcasting Apps and will continue capitalize software costs to the extent that such development
qualifies for capitalization.
General and administrative
General and administrative
expenses increased by $353,209 or 11.0% to $3,576,729 for the year ended December 31, 2023 compared to $3,223,520 for the year ended December
31, 2022. The increase resulted primarily from an increase in professional fees, such as, accounting and legal expenses.
Depreciation and
amortization
Depreciation and amortization
expenses increased by $849,198 or 85.6% to $1,840,837 for the year ended December 31, 2023 compared to $991,639 for the year ended December
31, 2022. The increase is entirely related to the increased amortization of our faidr and podcasting Apps.
Other expense,
net
Total other expenses
increased by $1,158,102 to $1,331,128 for the year ended December 31, 2023 compared to $173,026 for the year ended December 31, 2022.
The increase is related to actual and imputed interest expense attributed to the Secured Bridge Notes issued during November of 2022 and
April 2023.
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Income taxes
Since our inception in
2012, until the corporate conversion in February 2021, we were organized as a Colorado limited liability company for federal and state
income tax purposes and treated as a partnership for U.S. income tax purposes. As such, we were not viewed as a taxpaying entity in any
jurisdiction and do not require a provision for income taxes. Each member of our company was responsible for the tax liability, if any,
related to its proportionate share of our taxable income.
Effective on February
16, 2021, we became treated as a corporation for U.S. income tax purposes and thus became subject to U.S. federal, state and local income
taxes and are be taxed at the prevailing corporate tax rates. Among other things, we may begin to generate net operating losses at the
corporate level. We will account for income taxes using an asset and liability approach, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements but
have not been reflected in taxable income. A valuation allowance is established to reduce deferred tax assets to its estimated realizable
value, which is zero based on our operating history.
Going Concern
Our existing cash of $804,556 at December
31, 2023 will only be sufficient to fund our current operating plans into February 2024. The Company secured approximately $3.6 million
in additional financing in February and March 2024. The Company had approximately $2.8 million in cash and approximately $4.0 million
in debt due at March 31, 2024 and the Company is actively working to refinance the existing debt and raise additional capital, but cannot
be certain of the outcome and timing. 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.
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 app and podcasting apps. As of December
31, 2023, and 2022 we had cash of $804,556 and $1,661,434, respectively. We have a deficiency in working capital in the amount of approximately
$3.1 million at December 31, 2023. We anticipate that operating losses and net cash used in operating activities will increase over the
next 12 months as we continue to develop and market our products. Our existing cash of $804,556 at December 31, 2023 will only be sufficient
to fund our current operating plans into February 2024. The Company secured approximately $3.6 million in additional financing in February
and March 2024. The Company had approximately $2.8 million in cash and approximately $4.0 million in debt due at March 31, 2024 and the
Company is actively working to refinance the existing debt and raise additional capital, but cannot be certain of the outcome and timing.
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.
Interim Bridge Financings
As previously disclosed,
on November 14, 2022, we entered into a Secured Bridge Note (“Prior Note”) financing with one of our accredited investors,
a significant existing shareholder of the Company. We received $2,000,000 of gross proceeds from the Prior Note financing.
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On April 17, 2023, we
entered into an additional Secured Bridge Note (“New Note”) financing with the same accredited investor from the Prior Note
financing. We received $750,000 of gross proceeds from the New Note financing. The New Note was issued with a principal amount of $825,000,
10% interest rate and a maturity date on July 31, 2023. The New Note is secured by a lien on substantially all of our assets. At maturity
of the New Note, the accredited investor, or our lender, has the option to convert any original issue discount and accrued but unpaid
interest into shares of our common stock at a fixed conversion price of $15.25 per share.
In connection with the
New Note financing, we issued 26,000 common stock warrants to the accredited investor with a five-year term and a fixed $15.25 per share
exercise price, from which 13,000 of these common stock warrants are exercisable immediately. The remaining 13,000 common stock warrants
would only become exercisable if the maturity date of the New Note is extended in accordance with the terms of the New Note. As of July
31, 2023, we extended the maturity date of the New Note to November 30, 2023. Upon the July 31, 2023 extension, the interest rate on the
New Note increased to 20% from 10%, and the remaining portion of the 13,000 common stock warrants became exercisable. As of November 30,
2023, we extended the maturity date of the Prior Note and New Note to March 31, 2024. All terms of the Prior Note and New Note, such as
interest rate and exercisable common stock warrants remained the same. The accredited investor did not exercise the common stock warrants
as of December 31, 2023 or subsequent to December 31, 2023 and as of the date of this filing.
Further, in connection
with the New Note financing, the parties agreed to make certain amendments to the Prior Note financing. Specifically, the parties agreed
to cancel the 12,000 common stock warrants issued as part of the prior financing and, in lieu of the cancelled warrants, issued the investor
common stock warrants for 24,000 common shares with an exercise price of $15.25 per common share and a five-year term. From the newly
issued 24,000 common stock warrants, 12,000 common stock warrants were exercisable immediately, while the other 12,000 common stock warrants
became exercisable at the time of extension of the maturity date of the Prior Note during May of 2023.
In order for the accredited investor to receive
common shares from a conversion or exercise of the common stock warrants, an approval is required from the shareholders, if the number
of common shares to be issued to the accredited investor, when aggregated with all other shares of common stock beneficially or deemed
beneficially owned by the accredited investor would (i) result in the investor owning more than the Beneficial Ownership Limitation (as
defined below), as determined in accordance with Section 13 of the Securities Exchange Act of 1934 or (ii) otherwise constitute a Change
of Control within the meaning of Nasdaq Rule 5635(b). The “Beneficial Ownership Limitation” shall be 19.99% of the number
of shares of the common stock outstanding immediately prior to the proposed issuance of shares of common stock.
Equity Line Sales
of Common Stock
On November 14, 2022,
we 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.
On April 17, 2023 and
April 20, 2023, we closed on two sales of Common Stock under the White Lion Purchase Agreement. We issued an aggregate of 78,489 common
shares and received aggregate proceeds of approximately $1.12 million.
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Replacement Equity
Line with White Lion
On November
6, 2023, we 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, we have 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 our 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.
From February 15, 2024 through March 19, 2024, the Company has sold
1,340,000 shares to White Lion for total proceeds of $3,606,508. We currently have an effective registration statement that registers
for resale by White Lion up to 765,263 shares of common stock that we may issue to White Lion under the Equity Line Purchase Agreement.
After White Lion has acquired shares under the Equity Line Purchase Agreement, it may sell all, some or none of those shares. Sales to
White Lion by us pursuant to the Equity Line Purchase Agreement may result in substantial dilution to the interests of other holders of
our common stock.
Cash Flow Analysis
Our cash flows from operating
activities have historically been significantly impacted by revenues received, our investment in sales and marketing to drive growth,
and research and development expenses. Our ability to meet future liquidity needs will be driven by our operating performance and the
extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material
adverse effect on our ability to meet our liquidity needs and achieve our business objectives.
The following table summarizes
the statements of cash flows for the years ended December 31, 2023, and 2022:
Cash Flow Analysis
Year Ended December 31,
2023
2022
Net cash provided by (used in):
Operating activities
(4,504,207 )
(4,752,750 )
Investing activities
(1,031,566 )
(1,931,107 )
Financing activities
4,678,895
2,000,000
Change in cash
(856,878 )
(4,683,857 )
Operating Activities
Cash used in operating
activities for the year ended December 31, 2023, was $4,504,207, primarily resulting from our net loss of $8,807,496 and change in working
capital of $554,983 related to an increase in accounts payable and accrued liabilities, offset by non-cash charges of $3,748,306 related
to depreciation and amortization, share based compensation expense, and finance charges associated with the debt issuance costs of the
Secured Bridge Notes. Cash used in operating activities for both periods consisted of personnel-related expenditures, marketing and promotion
costs, and public company administrative support costs such as legal and other professional support services.
Cash used in operating
activities for the year ended December 31, 2022, was $4,752,750, primarily resulting from our net loss of $6,897,446, partially offset
by non-cash charges of $2,131,362.
Investing Activities
Cash flows used in investing
activities for the years ended December 31, 2023, and December 31, 2022, consisting primarily of capitalization of software development
expenses of $1,029,157 and $1,927,298, respectively.
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Financing Activities
Cash flows generated
in financing activities for the year ended December 31, 2023 was $4,678,895 and related primarily to cash proceeds from the issuance of
common shares of $4,016,523 and proceeds from related party debt of $750,000.
Cash flows provided by
financing activities for the year ended December 31, 2022 of $2,000,000 was associated with the proceeds from the secured bridge note
financing in November 2022.
Funding Requirements
We historically have
incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $80,543,330
and $71,735,834 as of December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023, and December 31, 2022, we had cash
of $804,556 and $1,661,434, respectively. Our cash is comprised primarily of demand deposit accounts and money market funds. The Company
secured approximately $3.6 million in additional financing in February and March 2024. The Company had approximately $2.8 million in cash
and approximately $4.0 million in debt due at March 31, 2024 and the Company is actively working to refinance the existing debt and raise
additional capital, but cannot be certain of the outcome and timing. 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.
We expect our expenses to increase in connection
with our ongoing activities, particularly as we continue the development, and marketing and promotion of faidr. In addition, we expect
to continue to incur additional costs associated with operating as a public company, including legal, accounting, investor relations and
other expenses. Our future funding requirements will depend on many factors, including, but not limited to:
·
the scope, progress, results, and costs related to the market acceptance of our products
·
the ability to attract podcasters and content creators to faidr and retain listeners on the platform
·
the costs, timing, and ability to continue to develop our technology
·
effectively addressing any competing technological and market developments
·
avoiding and defending against intellectual property infringement, misappropriation and other claims
Contractual Obligations
The following table summarizes
our contractual obligations not on our Balance Sheet as of December 31, 2023, 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)
$ 114,085
$ 24,447
$ 74,903
$ 14,735
$ –
Total operating lease commitments
$ 114,085
$ 24,447
$ 74,903
$ 14,735
$ –
(1)
Represents minimum payments due for the lease of the month-to-month office space
of $1,600 for three months and base rent under the operating lease commencing on April 1, 2024.
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Off-balance sheet
arrangements
We did not have during
the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the
SEC.
Critical Accounting Policies and Estimates
Our financial statements
and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make
estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related
disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts
and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions
and conditions.
Certain accounting policies
that require significant management estimates and are deemed critical to our results of operations or financial position, are described
below. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial
condition and results of operations.
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 impaired and expensed during the period of such determination.
Software development costs of $1,029,157 and $1,927,298 were capitalized in 2023 and 2022, respectively. Amortization expense of capitalized
software development costs were $1,815,447 and $956,144 for the years ended December 31, 2023, and 2022, respectively and are included
in depreciation and amortization expense.
Equity-based compensation
Certain of our employees
and consultants have received grants of common shares in our company. These awards are accounted for in accordance with guidance prescribed
for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified. The
common shares receive distributions if any in an order of priority in accordance with our limited liability company agreement.
The fair value of each
award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the
expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option.
The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the
grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate
available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option
was estimated based on a mid-point method calculation.
Prior to our IPO in February
2021, we were a private company with no active public market for our common equity. Therefore, we have periodically determined the overall
value of our company and the estimated per share fair value of our common equity at their various dates using contemporaneous valuations
performed with the assistance of a third-party specialist and in accordance with the guidance outlined in the American Institute of CPA’s
Practice Aid.
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