S-1 1 clip_s1.htm FORM S-1

Table of Contents

 

 

As filed with the Securities and Exchange Commission on January 10, 2020

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

 

 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Clip Interactive, LLC

[to be converted as described herein to a corporation named]

 

Auddia Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware        

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

5755 Central Ave., Suite C

Boulder, Colorado 80301

 

 

Michael Lawless

Chief Executive Officer

Clip Interactive, LLC

5755 Central Ave., Suite C

Boulder, Colorado 80301

(303) 886-7867

 

 

Copies to:

 

 

Stanley Moskowitz, Esq.   Lawrence Cohen Esq
Bingham & Associates Law Group APC   Gordon Rees Scully & Mansukhani LLP
Second Street. Suite 195   Two North Central Avenue, Suite 2200
Encinitas, CA 92024   Phoenix, AZ 85004
858-523-0100   602-794-2485

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer     Accelerated filer  
Non-accelerated filer     Smaller reporting company  
        Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  

 

CALCULATION OF REGISTRATION FEE

 

                 
 

Title of Each Class

of Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering

Price per Share

 

Proposed

Maximum
Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, par value $0.001   3,180,000   5.00   $15,900,000   $2,063.82
 
 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended (the “Securities Act”). Includes the offering price of any additional shares that the underwriters have the option to purchase.
(2) The fee is calculated by multiplying the aggregate offering amount by 0.0001298, effective October 1, 2019, pursuant to Section 6(b) of the Securities Act.

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

   

 

 

EXPLANATORY NOTES

 

Clip Interactive, LLC, DBA Auddia, the registrant whose name appears on the cover of this registration statement, is a Colorado limited liability company. Prior to the effectiveness of this registration statement, Clip Interactive, LLC will convert into a Delaware corporation pursuant to a statutory conversion and be renamed Auddia Inc. as described in the section “Corporate Conversion” of the accompanying prospectus. In the prospectus, we refer to all of the transactions related to our conversion to a corporation as the Corporate Conversion. As a result of the Corporate Conversion, the members of Clip Interactive, LLC will become holders of shares of common stock of Auddia Inc. Except as disclosed in the prospectus, the financial statements and other financial information included in this registration statement are those of Clip Interactive, LLC and do not give effect to the Corporate Conversion. Shares of common stock of Auddia Inc. are being offered by the prospectus.

 

This registration statement contains two forms of prospectus, as set forth below.

 

  · Public Offering Prospectus.  A prospectus to be used for the initial public offering by Auddia Inc. of $6.0 million of shares of common stock (and an additional $900,000 of shares of common stock which may be sold upon exercise of the underwriters’ over-allotment option) through the underwriters named on the cover page of the Public Offering Prospectus.

 

  · Selling Stockholder Resale Prospectus.  A prospectus to be used in connection with the potential resale by certain selling stockholders of the shares of our common stock. The Public Offering Prospectus and the Selling Stockholder Resale Prospectus will be substantively identical in all respects except for the following principal points:

 

  · they contain different front covers;

 

  · all references in the Public Offering Prospectus to “this offering” or “this initial public offering” will be changed to “the IPO,” defined as the underwritten initial public offering of our common stock, in the Selling Stockholders Resale Prospectus;

 

  · all references in the Public Offering Prospectus to “underwriters” will be changed to “underwriters of the IPO” in the Selling Stockholders Resale Prospectus;

 

  · they contain different Use of Proceeds sections;

 

  · a Shares Registered for Resale section is included in the Selling Stockholder Resale Prospectus;

 

  · a Selling Stockholders section is included in the Selling Stockholder Resale Prospectus;

 

  · the section “Summary—The Offering” from the Public Offering Prospectus is deleted from the Selling Stockholder Resale Prospectus;

 

  · the section “Shares Eligible For Future Sale—Selling Stockholder Resale Prospectus” from the Public Offering Prospectus is deleted from the Selling Stockholder Resale Prospectus;

 

  · the Underwriting section from the Public Offering Prospectus is deleted from the Selling Stockholder Resale Prospectus and a Plan of Distribution section is inserted in its place;

 

  · the Legal Matters section in the Selling Stockholder Resale Prospectus deletes the reference to counsel for the underwriters; and

 

  · they contain different back covers.

 

 

 

 

   

 

 

The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated __________, 2020

Preliminary Prospectus

 

1,200,000 shares

of Common Stock

 

AUDDIA INC.

 

 

 

This is an initial public offering of shares of common stock by Auddia Inc. Auddia Inc. is selling 1,200,000 shares of our common stock (the “Underwritten Shares”). We anticipate that the initial public offering price will be $_____ per share. Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Network 1 Financial Securities, Inc. is acting as representative, have severally agreed to purchase, and we have agreed to sell to them, severally, 1,200,000 shares of common stock.

 

Prior to this IPO, there has been no public market for our common stock.

 

We expect to list our common stock on the New York Stock Exchange or on The Nasdaq Capital Market, under the symbol “AUDD.”

 

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements.

 

   Per Share   Total  
Initial public offering price  $      $   
Underwriting discounts and commissions (1)  $    $    
Proceeds, before expenses, to us  $
    $    

 

(1) The underwriters will receive compensation in addition to the underwriting discounts and commissions. See “Underwriting” beginning on page 66.

 

The Company has granted the underwriters an option for a period of 30 days to purchase up to an additional 180,000 shares of common stock.

 

 

 

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 9 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to investors on or about                 , 2020.

 

 

  

 

 

 

The date of this prospectus is                 , 2020

 

Neither we nor the underwriters have authorized anyone to provide you with information other than that contained in this prospectus or any free writing prospectus prepared by or on behalf of us or to which we have referred you. The underwriters and we take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The underwriters and we are offering to sell, and seeking offers to buy, common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 

 

 

   

 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
The IPO 5
Information Regarding Forward Looking Statement 6
Risk Factors 7
Use of Proceeds 21
Dividend Policy 22
Corporate Conversion 22
Cash and Capitalization 23
Dilution 25
Management Discussion and Analysis of Financial Condition and Results of Operations 27
Business 35
Management 41
Compensation of our Executive Officers and Directors 47
Certain Relationships and Related Persons Transactions 53
Principal Stockholders 55
Description of Capital Stock 56
Shares Eligible for Future Sale 60
Underwriting 63
Legal Matters 68
Experts 68
Where you can find more Information 68
Index to Financial Statements F-1

 

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this public offering and the distribution of this prospectus applicable to that jurisdiction.

 

 

 

 i 

 

 

MARKET AND INDUSTRY DATA

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 ii 

 

 

PROSPECTUS SUMMARY

 

This prospectus summary highlights certain information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read the entire prospectus carefully, including the information under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto included in this prospectus, before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Information regarding forward-looking statements.”

 

Immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, we will undertake a corporate conversion pursuant to which Auddia Inc. will succeed to the business of Clip Interactive LLC and the holders of membership interests of Clip Interactive, LLC will become stockholders of Auddia Inc. In this prospectus, we refer to this transaction as the “Corporate Conversion.” References in this prospectus to our capitalization and other matters pertaining to our common equity relate to the capitalization and common equity of Clip Interactive, LLC after giving effect to the Corporate Conversion. However, the financial statements and summary historical financial data included in this prospectus are those of Clip Interactive, LLC and do not give effect to the Corporate Conversion.

 

In this prospectus, unless the context otherwise requires, the terms “Clip Interactive,” “Auddia,” “the Company,” “we,” “us” and “our” refer, prior to the Corporate Conversion discussed herein, to Clip Interactive, LLC., and after the Corporate Conversion, to Auddia Inc.

 

This prospectus includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marks and trade names included in this prospectus are the property of their respective owners.

 

Overview

 

Auddia has developed technology to enable consumers to listen to existing AM/FM radio stations without commercials. By leveraging our existing platform that currently serves the commercial radio industry, and by deploying new artificial (AI) technologies that can identify and segment different units of audio content, we plan to bring to market a premium, subscription-based AM/FM radio listening experience through a downloadable app called AuddiaSM (the “Auddia App”). By downloading and subscribing to the Auddia App, consumers will no longer need to listen to commercials in order to enjoy their favorite local radio stations. We intend to introduce the Auddia App in early 2020.

 

The Company believes the commercial AM/FM radio industry has a significant problem with excessive advertising load. In 2018, AM/FM radio averaged 16.1 minutes of commercials per hour, equating to 32 thirty-second spot ads per hour. To avoid listening to so many commercials, we believe consumers have reacted by embracing paid and free offerings such as Spotify, Apple Music, Pandora, Sirius XM, as well as the emerging podcasting industry. According to the IFPI Global Music Report, overall digital music revenue grew by 21.1% to $11.2 billion in 2018, crossing the $10 billion mark for the first time ever. Digital now accounts for about 60% of total recorded music revenues. Streaming pushed growth up strongly (increasing by 34.0% to $8.9 billion). We believe that virtually none of the $11 billion of monthly subscription revenue went to existing commercial radio broadcasters. 

 

As of December 2019, we believe there are no paid subscription offerings that provide advertising-free access to commercial AM/FM radio stations. According to Edison Research’s “Share of Ear” study, AM/FM radio continues to be the platform that dominates the time consumers spend listening to audio. Although there are many reasons consumers listen to AM/FM radio, we believe the primary competitive advantage held by AM/FM radio is their ability to curate locally relevant content across multiple formats such as news, talk, sports, weather, traffic and music. We believe consumers value access to this local content as well as the local personalities (DJs) for which broadcast radio is well known. We also believe that other than commercial AM/FM radio stations, there is no alternate platform that has the people, infrastructure, talent and experience required to compete with AM/FM radio’s ability to curate local content.

 

The Company has developed its artificial intelligence (“AI”) technology platform on top of Google’s TensorFlow open source library. Our AI platform is being “taught” to know the difference between all types of audio content. For instance, our 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, it also identifies the beginning and end of each piece of content. With this technology, audio content can be broken up into discrete units, allowing for the removal of ads and the replacement with any other non-commercial content (e.g., songs, talk segments, weather reports, etc.).

 

 

 

 

 1 
 

 

The Company is developing its AI powered platform and application to give consumers the first commercially available opportunity to subscribe to an application, the Auddia App, in order to listen to any streaming AM/FM radio station without commercials. Subscribers will be also be able to personalize their experience through “skips” and on-demand capabilities. Starting with this new AM/FM radio listening experience, the Company expects to evolve its technology to become the preferred audio listening platform for consumers across all forms of audio content. We believe AI technologies and the enablement of personalization of content through consumer choice will have a profound impact on the delivery of all content, especially audio. The Company’s early assessment of consumer interest, as evidenced in the results of an in-depth survey commissioned by the Company, suggests commercial viability of the Auddia App product.

  

Products and Technology

  

The Company develops technology and products that are expected to cover a broad spectrum of the evolving audio content ecosystem. The Company continues to operate its “Interactive Radio” platform, which has served more than 580 radio stations across the U.S. and internationally for almost seven years. This platform allows broadcasting companies and their individual stations to increase content engagement, including engagement with commercial content, and enables measurement of consumer response and action.

 

The development, maintenance and operation of our technology platform, which consists of a Content Management System (CMS); integrations into leading programmatic ad platforms; and advanced analytics capabilities, will be leveraged in the development and operations of our products. These products are described immediately below.

.

 

 

 

The Auddia AppSM, is a subscription based commercial free AM/FM software application we are building that will allow subscribers to listen to any AM/FM radio station without commercials, skip content they do not like and request content they want to hear. The Company leverages a proprietary AI technology that the Company is training to learn the difference between varying audio segments such as commercials, music, news, sports, traffic, weather, DJ chatter, etc., to give subscribers the ability to eliminate commercials and other content from their radio listening experience.

 

We believe the Auddia App will give commercial radio broadcasters and the Company a path to pursue subscription revenue by leveraging the marketing power of broadcasters to gain end-users from not only existing radio listeners but also from Sirius XM and internet streaming subscribers. The Company expects to use subscription revenue to secure agreements with radio broadcasters to promote the Auddia App.

 

 

Vodacast is an interactive podcasting platform and application the Company is building that will allow podcasters to give their audiences an interactive audio experience. Podcasters will integrate our Vodacast platform in their podcast to enable their listeners to see video and other digital content in a digital feed that correlates with the podcast audio. All content presented in the digital feed can be synched to the podcast audio content. This allows users or to visually experience and interact with audio content in podcasts, so long as the users are listening on the Vodacast App or any other platform that supports the Vodacast enhanced digital feed. Initially, there will be no fee charged for the downloading of the Vodacast App.

 

Much of the core technology we use in Vodacast to create the feed of digital content synchronized to the audio content of the podcast is fully developed and represents the core technology the Company has used historically to provide synchronized digital feeds to over 500 radio stations. Additional technology needs to be built to fully develop the Vodacast App user interface.

 

Vodacast will introduce a new digital revenue stream to podcasters, such as synchronized digital advertising, while providing Vodacast App users a new digital content channel that compliments the core audio channel of the podcast. Below are hypothetical screenshots from a Podcast. The image on the left is an example of the face page of a current audio only podcast feed while the image on the right is an example of how a Vodacast enhanced podcast will appear to the podcast listener. Also, within the Vodacast App, digital ads can be placed to drive revenue.

  

 

 

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Risks associated with our business

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” at page 9 before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition, results of operations and prospects would likely be materially, adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

  · we are an early stage technology company with a limited operating history. There can be no assurance that any of our future services will be successfully developed, protected from competition by others, or marketed successfully. Accordingly, there can be no assurance that we will ever have positive net earnings;
     
  · we have incurred significant net losses since inception and anticipate that we will continue to incur net losses for the foreseeable future and may never achieve or maintain profitability;
     
  · even if this IPO is successful, we may need additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this capital when needed may force us to delay, limit or terminate our product development efforts or other operations;
     
  ·

Assuming the sale by us of 1,200,000 shares of common stock in this IPO (or 1,380,0000 shares if the underwriters exercise their option to purchase additional shares in full), our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this IPO will, in the aggregate, beneficially own shares representing approximately 22.7% of our capital stock upon completion of this IPO. As a result, if these stockholders were to act together, they would be most likely be able to control all matters submitted to our stockholders for approval, as well as our management and affairs.

     
  · we have identified material weaknesses in our internal control over financial reporting. If   we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations;
     
  · loss of any members of our executive management team will significantly impair our ability to implement our business strategy;
     
  · damage to our reputation could negatively impact our business, financial condition and results of operations; and
     
  · declining economic conditions, including rising unemployment rates, lower disposable income, credit conditions, and consumer confidence and other events or factors may adversely affect consumer spending in the markets we serve.

 

 

 

 3 
 

 

Implications of being an emerging growth company

 

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”).

 

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

  · inclusion of only two years, as compared to three years, of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
     
  · an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act”);
     
  · an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;
     
  · reduced disclosure about executive compensation arrangements; and
     
  · an exemption from the requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We may take advantage of these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this IPO, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior September 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

We have taken advantage of the reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from other public companies that are not emerging growth companies.

 

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies.

 

Our corporate information

 

We were originally formed as Clip Interactive, LLC in January 2012, as a limited liability company under the laws of the State of Colorado. Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will convert into a Delaware corporation pursuant to a statutory conversion and be renamed Auddia Inc. See “Corporate Conversion.”

 

Our principal executive offices are located at 5755 Central Ave., Suite C, Boulder, CO 80301. Our main telephone number is (303) 886-7867. Our internet website is www.auddia.com. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.

  

Trademark notice

 

We have registered trademarks with the U.S. Patent and Trademark Office, or USPTO, for the marks “CLIP INTERACTIVE” and have applied for the Service Mark “Auddia.” All other trademarks, service marks and trade names in this prospectus are the property of their respective owners. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.

 

 

 

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THE IPO

 

Common stock offered by the Company 1,200,000 shares
   
Common stock offered by Selling Shareholders 1,800,000 shares
   
Common stock to be outstanding after this IPO 8,012,814 shares
   
Option to purchase additional shares We have granted the underwriters a 30-day option to purchase up to 180,000 additional shares of our common stock.
   
Use of proceeds

We expect to receive net proceeds from this IPO of approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares of our common stock in full, assuming an initial public offering price of $         per share, after deducting the underwriting discounts and commissions and estimated IPO expenses payable by us. We will receive no proceeds from the sale of shares by Selling Shareholders.

 

We intend to use the net proceeds from this IPO (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares of our common stock), together with our existing cash, to build out the Auddia and Vodacast platforms, expand our sales and marketing efforts, and for general and administration expenses and other general corporate purposes. See “Use of Proceeds.”

   
Proposed Nasdaq symbol We have applied to list our common stock on the Nasdaq under the symbol “AUDD.”
   
Risk factors Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
   
Lock-up

We, each of our officers, directors, and all of our stockholders have agreed, subject to certain exceptions, not to sell, offer, agree to sell, contract to sell, hypothecate, pledge, grant any option to purchase, make any short sale of, or otherwise dispose of or hedge, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock, for a period of (i) one-hundred eighty (180) days after the date of this prospectus, without the prior written consent of Network 1 Financial Securities, Inc. See “Shares Eligible For Future Sale” and “Underwriting” for additional information.

 

·

The number of shares outstanding after this IPO is based on the number of shares of our common stock outstanding as of September 30, 2019, after giving effect to the Corporate Conversion and the issuance of 800,000 common shares for the assumption of $4 million in debt, the issuance of 812,646 shares in exchange for Convertible Debt, and excludes 602,633 shares of our common stock reserved for issuance under our 2019 Equity Incentive Plan, and 1,384,553 shares of common stock reserved for issuance upon the exercise of common share purchase warrants.

   
 ·no exercise by the underwriters of their option to purchase 180,000 additional shares of our common stock.

 

 

 

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believe,” “estimate,” “project,” “anticipate,” “expect,” “seek,” “predict,” “continue,” “possible,” “intend,” “may,” “might,” “will,” “could,” would” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our product candidates, research and development, commercialization objectives, prospects, strategies, the industry in which we operate and potential collaborations. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

 

Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. All forward-looking statements are based upon information available to us on the date of this prospectus. Important factors that could cause our results to vary from expectations include, but are not limited to: 

 

  · our expenses, ongoing losses, future revenue, capital requirements and need for and ability to obtain additional financing;
     
  · changes in senior management, loss of one or more key personnel or our inability to attract, hire, integrate and retain highly skilled personnel;
     
  · our ability to avoid and defend against intellectual property infringement, misappropriation and other claims including breaches of security of confidential consumer information;
     
  · difficulties with certain vendors and suppliers we rely on or will rely on;
    .
  · our competition and market development; and
     
  · the impact of laws and regulations on our operations.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, business and prospects may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition, business and prospects are consistent with the forward-looking statements contained in this prospectus, those results may not be indicative of results in subsequent periods.

 

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with. Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors, including those set forth below under “Risk Factors” and elsewhere in this prospectus. The factors set forth below under “Risk Factors” and other cautionary statements made in this prospectus should be read and understood as being applicable to all related forward-looking statements wherever they appear in this prospectus. The forward-looking statements contained in this prospectus represent our judgment as of the date of this prospectus. We caution readers not to place undue reliance on such statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this prospectus.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and related notes included elsewhere in this prospectus, before making an investment decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects would likely be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

 

Risks related to our financial position and need for additional capital

 

We have incurred significant net losses since inception and anticipate that we will continue to incur net losses for the foreseeable future and may never achieve or maintain profitability.

 

Since inception, we have incurred significant net losses. Our net losses were $2,717,654 and $3,510,011 for the years ended December 31, 2017 and 2018, respectively and a net loss of $3,133,817 for the nine months ended September 3, 2019. As of September 30, 2019, we had an accumulated deficit of $47,215,177. To date, we have devoted our efforts towards securing financing, building and evolving our technology platform, marketing our mobile app product for radio stations as well as initiating our marketing efforts for our music player. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if, and as, we:

 

·hire and retain additional sales, accounting and finance marketing and engineering personnel;
   
·build out our product pipeline;
   
 ·add operational, financial and management information systems and personnel; and
   
 ·maintain, expand, protect and enforce our intellectual property portfolio.

 

To become profitable, we must develop and eventually commercialize one or more product candidates, including Auddia and Vodacast, with significant market potential. This will require us to be successful in a range of challenging activities, and our expenses will increase substantially as we seek to bring these products to market. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, develop new products, expand our business or continue our operations. A decline in the value of our company also could cause stockholders to lose all or part of their investment.

 

Even if this IPO is successful, we may need additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to invest in sales, marketing and engineering resources and bring our products to market. Furthermore, upon the closing of this IPO, we expect to incur additional costs associated with operating as a public company. While we believe that the net proceeds from this IPO and our existing cash, cash equivalents and available-for-sale securities will be sufficient to fund our current operating plans through at least the next 12 months, we anticipate that we may need additional funding to complete the development of our full product line and scale products with a demonstrated market fit.

 

 

 

 7 

 

 

Building and scaling technology products is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary user experience required to obtain market acceptance and achieve meaningful product sales. In addition, our product candidates, once developed, may not achieve commercial success. The majority of revenue will be derived from or based on sales of software products that may not be commercially available for many years, if at all. Accordingly, we will need to continue to rely on revenues from existing products and/or additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies and product candidates.

 

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, or our other product candidates, or grant licenses on terms unfavorable to us.

 

We have generated historical revenue from our mobile app platform for radio stations but future revenue growth is dependent on new software services.

 

Our ability to generate revenue from product sales and achieve profitability depends on our ability to successfully complete the development and commercialization of future software products. Our ability to generate meaningful revenue from product sales depends heavily on our success in:

 

·obtaining market acceptance;
   
·effectively addressing any competing technological and market developments;
   
 ·negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations under such arrangements;
   
 ·maintaining, protecting, enforcing and expanding our portfolio of intellectual property rights, including patents, trademarks, trade secrets and know-how;
   
 ·avoiding and defending against intellectual property infringement, misappropriation and other claims;
   
 ·implementing additional internal systems and infrastructure, as needed; and
   
 ·attracting, hiring and retaining qualified personnel.

 

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

 

We are a development-stage company founded in 2012. Our operations to date, with respect to our music player and other potential new product candidates, have been limited to organizing and staffing our company, business planning, raising capital, building our core technology platform, commercializing our music player and entering into business development discussions with potential customers.

 

 

 

 8 

 

 

 

We have identified material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately or timely report our financial condition or results of operations, which could have a material adverse effect on our business and stock price.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. Management is working to remediate our current material weaknesses and prevent potential future material weaknesses by hiring additional qualified accounting and financial reporting personnel, and further reviewing and enhancing our accounting processes. We may not be able to fully remediate any future material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time. If we are not able to maintain effective internal control over financial reporting, our financial statements and related disclosures may be inaccurate, which could have a material adverse effect on our business and our stock price.

 

Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our controls over financial reporting. Although we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal controls over financial reporting pursuant to Section 404 until our annual report on Form 10-K for the fiscal year ending December 31, 2020. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on the effectiveness of our internal control over financial reporting, provided that our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an emerging growth company, as defined in the JOBS Act. We could be an emerging growth company for up to five years.

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our business.

 

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. The rapid growth of our operations and the planned initial public offering has created a need for additional resources within the accounting and finance functions due to the increasing need to produce timely financial information and to ensure the level of segregation of duties customary for a U.S. public company. We continue to reassess the sufficiency of finance personnel in response to these increasing demands and expectations.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

 

We expect to expend significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act. We cannot be certain that the actions we will be taking to improve our internal controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner. In addition, if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our Class A common stock to decline and make it more difficult for us to finance our operations and growth.

 

Our auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing.

 

Our working capital deficiency, stockholders’ deficit and recurring losses from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements for the year ended December 31, 2018 with respect to this uncertainty. Our ability to continue as a going concern will require us to obtain additional funding. We believe that the net proceeds from this IPO and our existing cash will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. 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.

 

 

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Risks related to the development of our products

 

Our subscription revenue margins and our freedom to operate our Auddia commercial-free radio platform rely on continuity of the established music licensing framework.

 

Present music licensing costs and general rights to play music are determined by an established statutory rate framework which could change in the future. Changes in licensing costs and general rights to play music content could impact our direct costs for content or even prohibit access to content that is fundamental to the platform. Changes could adversely impact our cost to operate the platform and/or our rights to deliver content to end users.

 

Our Auddia platform will rely on the established “personal use exemption” which allows individuals to record content for personal use, without prohibition.

 

The Auddia platform will allow consumers to access broadcast audio content “live,” in real-time, and also enables end users to personally record audio content for later consumption. We believe that Auddia will rely on an established precedent which permits individuals to record and replay content (audio and/or video) so long as it is for personal use, only (the “Personal Use Exemption”). While the Personal Use Exemption has been well established, there is a risk that the Personal Use Exemption may not apply to the Auddia platform. If it is found that Auddia is not able to rely upon the Personal Use Exemption, the costs to the Company for music content would increase significantly and result in an increase in the consumer price for Auddia, thus making Auddia less desirable in the marketplace.

 

If we are unable to obtain and maintain patent protection for our products and product candidates, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and product candidates similar or identical to ours, and our ability to successfully commercialize our products and product candidates may be adversely affected.

 

Our commercial success will depend, in part, on our ability to obtain and maintain patent protection in the United States and other countries with respect to our products and product candidates. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our products and product candidates that are important to our business.

 

We cannot be certain that additional patents will be issued or granted with respect to applications that are currently pending or that we may apply for in the future with respect to one or more of our products and product candidates, or that issued or granted patents will not later be found to be invalid and/or unenforceable.

 

The patent prosecution process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, collaboration partners, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection.

 

Real or perceived errors, failures or bugs in our platform or products could materially and adversely affect our operating results and growth prospects.

 

The software underlying our platform and products is highly technical and complex. Our software has previously contained, and may now or in the future contain, undetected errors, bugs or vulnerabilities. In addition, errors, failures and bugs may be contained in open source software utilized in building and operating our products or may result from errors in the deployment or configuration of open source software. Some errors in our software may only be discovered after the software has been deployed or may never be generally known. Any errors, bugs or vulnerabilities discovered in our software after it has been deployed, or never generally discovered, could result in interruptions in platform availability, product malfunctioning or data breaches, and thereby result in damage to our reputation, adverse effects upon customers and users, loss of customers and relationships with third parties, including social media networks, loss of revenue or liability for damages. In some instances, we may not be able to identify the cause or causes of these problems or risks within an acceptable period of time.

 

 

 

 10 

 

 

Risks related to our business operations

 

Our future success depends on our ability to retain key employees, consultants and advisors and to attract, retain and motivate qualified personnel.

 

We are highly dependent on members of our executive team; the loss of whose services may adversely impact the achievement of our objectives. While we have entered into employment agreements with certain of our executive officers, any of them could leave our employment at any time. We currently do not have “key person” insurance on any of our employees. The loss of the services of one or more of our current employees might impede the achievement of our research, development and commercialization objectives.

 

Recruiting and retaining other qualified employees, consultants and advisors for our business, including scientific and technical personnel, will also be critical to our success. Competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous technology companies for individuals with similar skill sets. The inability to recruit, or loss of services of certain executives, key employees, consultants or advisors, may impede the progress of our product development and commercialization objectives.

 

If we are unable to manage expected growth in the scale and complexity of our operations, our performance may suffer.

 

If we are successful in executing our business strategy, we will need to expand our managerial, operational, financial and other systems and resources to manage our operations, continue our technology development activities and, in the longer term, scale a commercial infrastructure to support our product roll out and end user projections. Future growth would impose significant added responsibilities on members of management. It is likely that our management, finance, sales, marketing and engineering systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and future product commercialization requires that we continue to develop more robust business processes and improve our systems and procedures in each of these areas and to attract and retain sufficient numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our product development and growth goals.

 

Any cybersecurity-related attack, significant data breach or disruption of the information technology systems or networks on which we rely could negatively affect our business.

 

Our operations rely on information technology systems for the use, storage and transmission of sensitive and confidential information with respect to our customers, our customers’ consumers or other social media audiences, the third-party technology platforms of other parties and our employees. A malicious cybersecurity-related attack, intrusion or disruption by either an internal or external source or other breach of the systems on which our platform and products operate, and on which our employees conduct business, could lead to unauthorized access to, use of, loss of or unauthorized disclosure of sensitive and confidential information, disruption of our services, and resulting regulatory enforcement actions, litigation, indemnity obligations and other possible liabilities, as well as negative publicity, which could damage our reputation, impair sales and harm our business. Cyberattacks and other malicious internet-based activity continue to increase, and cloud-based platform providers of products and services have been and are expected to continue to be targeted. In addition to traditional computer “hackers,” malicious code (such as viruses and worms), phishing, employee theft or misuse and denial-of-service attacks, sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions). Despite efforts to create security barriers to such threats, it is not feasible, as a practical matter, for us to entirely mitigate these risks. If our security measures are compromised as a result of third-party action, employee, customer, or user error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation would be damaged, our data, information or intellectual property, or those of our customers, may be destroyed, stolen or otherwise compromised, our business may be harmed and we could incur significant liability. We have not always been able in the past and may be unable in the future to anticipate or prevent techniques used to obtain unauthorized access to or compromise of our systems because they change frequently and are generally not detected until after an incident has occurred. We also cannot be certain that we will be able to prevent vulnerabilities in our software or address vulnerabilities that we may become aware of in the future. Further, as we rely on third-party cloud infrastructure, we depend in part on third party security measures to protect against unauthorized access, cyberattacks and the mishandling of data and information. Any cybersecurity event, including any vulnerability in our software, cyberattack, intrusion or disruption, could result in significant increases in costs, including costs for remediating the effects of such an event, lost revenue due to network downtime, and a decrease in customer and user trust, increases in insurance premiums due to cybersecurity incidents, increased costs to address cybersecurity issues and attempts to prevent future incidents, and harm to our business and our reputation because of any such incident.

 

 

 

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There can be no assurance that any limitation of liability provisions in our technical and/or subscription agreements would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any claim related to a cybersecurity incident. We also cannot be sure that our existing general liability insurance coverage and coverage for cyber liability or errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, would harm our business.

 

Many governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of personal data. In addition, some of our customers require us to notify them of data security breaches. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode confidence in the effectiveness of our security measures, negatively affect our ability to attract new customers, encourage consumers to restrict the sharing of their personal data with our customers or the social media networks, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could harm our business.

 

Changing regulations and increased awareness relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and harm our brand.

 

We receive, store and otherwise process personal information and other data from and about our customers and our employees. We also receive personal information and other data about our customers’ consumers or other social media audiences. There are numerous federal, state, local and international laws and regulations regarding privacy, data protection, information security and the storing, sharing, use, processing, transfer, disclosure, retention and protection of personal information and other content, the scope of which is rapidly changing, subject to differing interpretations and may be inconsistent among countries and states, or conflict with other rules. We are also subject to the terms of our privacy policies and contractual obligations to third parties related to privacy, data protection and information security. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, the regulatory framework for privacy, data protection and information security worldwide is, and is likely to remain, uncertain for the foreseeable future, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.

 

We also expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security proposed and enacted in various jurisdictions. The United States, the European Union (“EU”), and other countries in which we currently or may operate are increasingly adopting or revising privacy, information security and data protection laws and regulations that could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of customer, consumer and/or employee information, as well as any other third-party information we receive, and some of our current or planned business activities. New and changing laws, regulations, and industry standards concerning privacy, data protection and information security may also impact the social media platforms and data providers we utilize, and thereby indirectly impact our business. In the United States, this includes increased privacy-related regulations and enforcement activity at both the federal level and state levels that impose requirements on the personal information we collect in the course of our business activities. In the EU, this includes the General Data Protection Regulation, or GDPR, which came into effect in May 2018. While we have taken measures to comply with applicable requirements contained in the GDPR, we may need to continue to make adjustments as more clarification and guidance on the requirements of the GDPR and how to comply with such requirements becomes available. Further, following a referendum in June 2016 in which voters in the United Kingdom approved an exit from the EU, the United Kingdom government has initiated a process to leave the EU, known as Brexit. Brexit has created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, although the United Kingdom enacted a Data Protection Act in May 2018 that is designed to be consistent with the GDPR, uncertainty remains regarding how data transfers to and from the United Kingdom will be regulated. Additionally, although we have self-certified under the U.S.-EU and U.S.-Swiss Privacy Shield Frameworks with regard to our transfer of certain personal data from the EU and Switzerland to the United States, some regulatory uncertainty remains surrounding the future of data transfers from the EU and Switzerland to the United States, and we are monitoring regulatory developments in this area. California also recently enacted legislation, the California Consumer Privacy Act of 2018, or CCPA, that will afford consumers expanded privacy protections and control over the collection, use and sharing of their personal information when it goes into effect on January 1, 2020. The CCPA was recently amended, and it is possible that it will be amended again before it goes into effect. The potential effects of this legislation are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. For example, the CCPA gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation.

 

 

 

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With laws and regulations such as the GDPR in the EU and the CCPA in the United States imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. For example, the increased consumer control over the sharing of their personal information afforded by CCPA may affect our customers’ ability to share such personal information with us or may require us to delete or remove consumer information from our records or data sets, which may create considerable costs for our organization. In addition, any failure or perceived failure by us to comply with our privacy policies, our privacy-, data protection- or information security-related obligations to customers, users or other third parties or any of our other legal obligations relating to privacy, data protection or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability, loss of relationships with key third parties including social media networks and other data providers, or cause our users to lose trust in us, which could have an adverse effect on our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our users may limit the adoption and use of, and reduce the overall demand for, our platform.

 

Additionally, if the third parties we work with, such as vendors or developers, violate applicable laws or regulations or our policies, such violations may also put our customers’ and their users’ and consumers’ or other social media audiences’ content at risk and could in turn have an adverse effect on our business. Any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of such content, or regarding the manner in which the express or implied consent of such persons for the collection, use, retention or disclosure of such content is obtained, could increase our costs and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process user data or develop new services and features. All of these implications could adversely affect our revenue, results of operations, business and financial condition.

 

Our business depends on a strong brand, and if we are not able to develop, maintain and enhance our brand, our business and operating results may be harmed. Moreover, our brand and reputation could be harmed if we were to experience significant negative publicity.

 

We believe that developing, maintaining and enhancing our brand is critical to achieving widespread acceptance of our platform and products, attracting new customers, retaining existing customers, persuading existing customers to adopt additional products and use-cases, and hiring and retaining our employees. We believe that the importance of our brand will increase as competition in our market further intensifies. Successful promotion of our brand will depend on a number of factors, including the effectiveness of our marketing efforts, including thought leadership, our ability to provide a high-quality, reliable and cost-effective platform, the perceived value of our platform and products and our ability to provide quality customer success and support experience. Brand promotion activities require us to make substantial expenditures. To date, we have made significant investments in the promotion of our brand. The promotion of our brand, however, may not generate customer awareness or increase revenue, and any increase in revenue may not offset the expenses we incur in building and maintaining our brand.

 

We operate in a public-facing industry in which every aspect of our business is impacted by social media. Negative publicity, whether or not justified, can spread rapidly through social media. To the extent that we are unable to respond timely and appropriately to negative publicity, our reputation and brand could be harmed. Moreover, even if we are able to respond in a timely and appropriate manner, we cannot predict how negative publicity may affect our reputation and business. We and our employees also use social media to communicate externally. There is risk that the use of social media by us or our employees to communicate about our business may give rise to liability or result in public exposure of personal information of our employees or customers, each of which could affect our revenue, business, results of operations and financial condition.

 

Enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates and may affect the prices we may set.

 

Our business and financial prospects could be affected by changes in regulations and policy in the United States and abroad. We operate in a highly regulated industry and new laws or judicial decisions, or new interpretations of existing laws or decisions, related to copyright or the personal use exemption for recording content and the amount of payment for content rights could negatively impact our business, operations and financial condition.

 

 

 

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We may be subject to litigation, disputes or regulatory inquiries for a variety of claims, which could adversely affect our results of operations, harm our reputation or otherwise negatively affect our business.

 

From time to time, we may be involved in litigation, disputes or regulatory inquiries that arise in the ordinary course of business. These may include claims, lawsuits and proceedings involving labor and employment, wage and hour, commercial, alleged securities law violations or other investor claims, and other matters. We expect that the number and significance of these potential disputes may increase as our business expands and our company grows larger. While our agreements with customers limit our liability for damages arising from our platform, we cannot assure you that these contractual provisions will protect us from liability for damages in the event we are sued. Although we carry general liability insurance coverage, our insurance may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, adversely affect our reputation and result in the diversion of significant operational resources. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our revenue, business, brand, results of operations and financial condition.

 

Risks related to our intellectual property

 

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, cyberattack, data security breaches or terrorism.

 

A significant natural disaster, such as an earthquake, fire or a flood, occurring where a business partner is located could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect our network service providers or Internet service providers, this could adversely affect the ability of our customers to use our products and platform. In addition, natural disasters and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. We also rely on our network and third-party infrastructure and enterprise applications and internal technology systems for our engineering, sales and marketing and operations activities. If a major disruption is caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition.

 

Any failure to protect our intellectual property rights could impair our business.

 

Our success and ability to compete depend in part upon our intellectual property. We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. However, the steps we take to protect our intellectual property rights may be inadequate. Because of the differences in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.

 

We have applied for patent protection in the United States relating to certain existing and proposed systems, methods and processes. We cannot assure that any of our patent applications will result in an issued patent. Any patent(s) we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, we cannot assure you that competitors will not infringe our patent(s), or that we will have adequate resources to enforce our patent(s).

 

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we have entered into confidentiality agreements with most of our employees and consultants. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, our business, financial condition and results of operations could be harmed.

 

 

 

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We rely on our trademarks, service marks, trade names, and brand names to distinguish our products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks in the United States and other jurisdictions. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks, or use and register confusingly similar trademarks in these or other jurisdictions. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition, and could require us to devote resources advertising and marketing new brands. Further, we cannot assure you that third parties will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.

 

Although we rely on copyright laws to protect the works of authorship (including software) created by us, we do not register the copyrights in any of our copyrightable works. Copyrights of U.S. origin must be registered before the copyright owner may bring an infringement suit in the United States. Furthermore, if a copyright of U.S. origin is not registered within three months of publication of the underlying work, the copyright owner is precluded from seeking statutory damages or attorney’s fees in any United States enforcement action, and is limited to seeking actual damages and lost profits. Accordingly, if one of our unregistered copyrights of U.S. origin is infringed by a third party, we will need to register the copyright before we can file an infringement suit in the United States, and our remedies in any such infringement suit may be limited.

 

In order to protect our intellectual property, we may be required to spend significant resources to monitor and protect our rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and adversely affect our business.

 

If third parties claim that we infringe upon or otherwise violate their intellectual property rights, our business could be adversely affected.

 

We face the risk of claims that we have infringed or otherwise violated third parties’ intellectual property rights. There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon or otherwise violating the intellectual property rights of others. From time to time, our competitors or other third parties may claim that we are infringing upon or otherwise violating their intellectual property rights, and we may be found to be infringing upon or otherwise violating such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology or conflict with our trademark rights. Any claims of intellectual property infringement or other intellectual property violations, even those without merit, could:

 

be expensive and time consuming to defend;
cause us to cease making, licensing or using our platform or products that incorporate the challenged intellectual property;
require us to modify, redesign, reengineer or rebrand our platform or products, if feasible;
divert management’s attention and resources; or
require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.

 

Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly settlement agreements, or prevent us from offering our platform or products, any of which could have a negative impact on our operating profits and harm our future prospects. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify our platform or products, or refund subscription fees, which could further exhaust our resources. Such disputes could also disrupt our platform or products, adversely affecting our customer satisfaction and ability to attract customers.

 

Our use of “open source” software could negatively affect our ability to offer and sell access to our platform and products and subject us to possible litigation.

 

We use open source software in our platform and products and expect to continue to use open source software in the future. There are uncertainties regarding the proper interpretation of and compliance with open source licenses, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to use such open source software, and consequently to provide or distribute our platform and products. Although use of open source software has historically been free, recently several open source providers have begun to charge license fees for use of their software. If our current open source providers were to begin to charge for these licenses or increase their license fees significantly, this would increase our research and development costs and have a negative impact on our results of operations and financial condition.

 

 

 

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Additionally, we may from time to time face claims from third parties claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of source code for the open source software, derivative works or our proprietary source code that was developed using or that is distributed with such open source software. These claims could also result in litigation and could require us to make our proprietary software source code freely available, require us to devote additional research and development resources to change our platform or incur additional costs and expenses, any of which could result in reputational harm and would have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer our platform or incur additional costs to comply with the changed license terms or to replace the affected open source software. Further, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software or indemnification for third party infringement claims. Although we have implemented policies to regulate the use and incorporation of open source software into our platform and products, we cannot be certain that we have not incorporated open source software in our platform and products in a manner that is inconsistent with such policies.

 

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

 

Our agreements with customers and other third parties may include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our platform, products or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, operating results and financial condition.

 

From time to time, customers may require us to indemnify or otherwise be liable to them for breach of confidentiality or failure to implement adequate security measures with respect to their data stored, transmitted or processed by our employees, platform or products. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our platform or products, and harm our revenue, business and operating results.

 

Risks related to this IPO and ownership of our common stock

 

After this IPO, our executive officers, directors and principal stockholders will maintain the ability to control all matters submitted to our stockholders for approval.

 

Assuming the sale by us of 1,200,000 shares of common stock in this IPO (or 1,380,0000 shares if the underwriters exercise their option to purchase additional shares in full), our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this IPO will, in the aggregate, beneficially own shares representing approximately 25.9% of our capital stock upon completion of this IPO. As a result, if these stockholders were to act together, they would be most likely be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in management of our company with which our public stockholders disagree.

 

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is performing well.

 

Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject to certain restrictions described below. These sales, or the perception in the market that holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 8,012,814 shares of common. This includes the shares that we are selling in this IPO, the 1,800,000 shares that are being offered for sale by the Selling Shareholders, which may be resold in the public market immediately without restriction, unless purchased by our affiliates, but does not include 602,633 common shares reserved for issuance upon the exercise of common share purchase options and 1,384,553 common shares reserved for issuance upon the exercise of common share purchase warrants. Following this offering, 4,212,814 shares will be restricted as a result of securities laws or lock-up agreements but may be able to be sold commencing 180 days after the IPO as described in the “Shares eligible for future sale” and “Underwriting” sections of this prospectus.

 

 

 

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If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

 

The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this IPO, you will pay a price per share that substantially exceeds our net tangible book value per share after this IPO. Based on an assumed initial public offering price of $____ per share, you will experience immediate dilution of $         per share, representing the difference between our pro forma net tangible book value per share after giving effect to this IPO at the assumed initial public offering price. In addition, purchasers of common stock in this IPO will have contributed approximately     % of the aggregate price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this IPO. See “Dilution.”

 

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this IPO.

 

Our stock price is likely to be volatile. The stock market in general and the market for technology companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

  · the success of competitive products or technologies;
     
  · regulatory or legal developments in the United States,
     
  · the recruitment or departure of key personnel;
     
  · the level of expenses related to any of our product candidates, and our commercialization efforts;
     
  · actual or anticipated changes in our development timelines;
     
  · our ability to raise additional capital;
     
  · disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our product candidates;
     
  · significant lawsuits, including patent or stockholder litigation;
     
  · variations in our financial results or those of companies that are perceived to be similar to us;
     
  · general economic, industry and market conditions; and
     
  · the other factors described in this “Risk Factors” section.


If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation often has been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs to defend such claims and divert management’s attention and resources.

 

 

 

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If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

 

The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

 

An active trading market for our common stock may not develop.

 

Prior to this IPO, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock listed on the Nasdaq Capital Market, an active trading market for our shares may never develop or be sustained following this IPO. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this IPO without depressing the market price for the shares, or at all.

 

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

 

We are an “emerging growth company” (“EGC”), as defined in the JOBS Act. We will remain an EGC until the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the completion of this IPO; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. For so long as we remain an EGC, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

  · not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404;
     
  · not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
     
  · being permitted to present only two years of audited financial statements, in addition to any required unaudited interim financial statements, and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;
     
  · reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
     
  · an exemption from the requirement to seek nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.


We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of reduced reporting burdens in this prospectus. In particular, we have not included all of the executive compensation information that would be required if we were not an EGC. We cannot predict whether investors will find our common stock less attractive if we rely on certain or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

As a public company, and particularly after we are no longer an EGC, we will incur significant legal, accounting and other expenses that we did not incur as a private company.

 

In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.

 

 

 

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Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

 

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company and are an accelerated or large accelerated filer.

 

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. In this regard, we will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. In addition, we have identified material weaknesses in our internal control over financial reporting and may identify further such material weaknesses, either of which we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404.

 

If unable to comply with the requirements of Section 404 to address and remediate in a timely manner material weaknesses identified in our internal control over financial reporting, or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the Nasdaq Capital Market on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

  

Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including, once we are no longer an EGC, an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

 

Provisions in our corporate charter and our bylaws and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Upon the completion of our anticipated Corporate Conversion, we will be a Delaware corporation. The anti-takeover provisions of the Delaware General Corporation Law (the “DGCL”) may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders.

 

Provisions in our corporate charter and our bylaws that will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

 

 

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  ·   allow the authorized number of our directors to be changed only by resolution of our board of directors;
       
  ·   limit the manner in which stockholders can remove directors from the board;
       
  ·   establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;
       
  ·   require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
       
  ·   limit who may call stockholder meetings;
       
  ·   authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the DGCL, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

Our charter will provide that the Court of Chancery of the State of Delaware is the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for such disputes with us or our directors, officers or employees.

 

Our charter that we expect it to be in effect prior to the effectiveness of the registration statement of which this prospectus forms a part will provide that the Court of Chancery of the State of Delaware is the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our charter or our bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our charter to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

 

 

 

 

 

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USE OF PROCEEDS

 

We expect to receive net proceeds from this IPO of approximately $        million, or approximately $        million if the underwriters exercise their option to purchase additional shares in full (assuming an initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

We will not receive any of the proceeds from the sale of the shares of our common stock being offered for sale by the selling shareholders. We will incur all costs associated with this registration statement and prospectus.

 

As of September 30, 2019, we had cash of $85,083. We intend to use the net proceeds from this IPO, together with our existing cash, to build out the Auddia and Vodacast platforms, expand our sales and marketing efforts, and for general and administration expenses.

 

Based on our current operational plans and assumptions, we expect that the net proceeds from this IPO, combined with our current cash, will be sufficient to fund operations through fiscal year 2020.

 

Our expected use of net proceeds from this IPO represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with complete certainty all of the particular uses for the net proceeds to be received upon the completion of this IPO or the actual amounts that we will spend on the uses set forth above. We believe opportunities may exist from time to time to expand our current business through the acquisition or in-license of complementary product candidates. While we have no current agreements for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

 

The amounts and timing of our actual expenditures will depend on numerous factors, including the progress of our product development team, the scale achieved by our sales and marketing team, as well as the amount of cash used in our operations. We therefore cannot estimate with certainty the amount of net proceeds to be used for the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending the uses described above, we plan to invest the net proceeds from this IPO in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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DIVIDEND POLICY

 

We have not declared or paid any cash dividends on our capital stock since our inception. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

 

CORPORATE CONVERSION

 

We currently operate as a Colorado limited liability company under the name Clip Interactive, LLC. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Clip Interactive, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Auddia Inc. In this prospectus, we refer to all of the transactions related to our conversion to a corporation and the mergers described above as the Corporate Conversion.

 

In conjunction with the Corporate Conversion, all of our outstanding membership units will be converted into an aggregate of 6,012,814 shares of our common stock. The number of shares of common stock issuable in connection with the Corporate Conversion will be determined pursuant to the applicable provisions of the plan of conversion. Upon the Conversion, the Company will issue 800,000 common shares to Mr. Jeffrey Thramann, in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

Outstanding LLC Membership Units:    794,357,802  
Common Stock Shares After Conversion:    6,012,814  
Shares of restricted common stock to be issued for:     
Series A Preferred shares    21,275  
Series B Preferred shares    22,094  
Series C Preferred   shares    1,429,119  
Series F Preferred shares    1,240,144  
Conversion of Convertible Notes   

812,646

 
Series 1 & 2 Common Shares    2,487,536  
Common shares reserved for option and warrant exercise     
Options    602,633  
Warrants    1,384,553  
Total   8,000,000 

 

In connection with the Corporate Conversion, Auddia Inc. will continue to hold all property and assets of Clip Interactive, LLC and will assume all of the debts and obligations of Clip Interactive, LLC. Auddia, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of which are described under the heading “Description of Capital Stock.” On the effective date of the Corporate Conversion, the members of the board of managers of Clip Interactive, LLC will become the members of Auddia, Inc.’s board of directors and the officers of Clip Interactive, LLC will become the officers of Auddia, Inc. In addition, we intend to appoint three additional directors upon the date of this prospectus (See “Management”)

 

The purpose of the Corporate Conversion is to reorganize our corporate structure so that the entity that is offering common stock to the public in this IPO is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than membership units in a limited liability company.

 

Except as otherwise noted herein, the financial statements included elsewhere in this prospectus are those of Clip Interactive, LLC. We do not expect that the Corporate Conversion will have a material effect on the results of our core operations.

 

 

 

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CASH AND CAPITALIZATION

 

The following table describes our cash and capitalization as of September 30, 2019 (unaudited):

 

  ·

On a pro forma basis to give effect to the Conversion of the Convertible Debt to equity on an actual basis;

     
  · on a pro forma basis to give effect to the Corporate Conversion and 10 million fully diluted shares outstanding, $0.01 per share par value.
     
  · on a pro forma as adjusted basis to additionally give effect to the sale of 1,200,000 shares of our common stock in this IPO, assuming an initial public offering price of $5.00 per share after deducting the underwriting discounts and commissions and estimated IPO expenses payable by us at 10% of the gross proceeds.
     
  · on a pro forma basis to give effect to the conversion and repayment of $4 million in bank debt into 800,000 common shares.
     
  · on a pro forma basis to give effect for the agreement to convert All Accrued Fees to a Related Party to equity.

 

You should read the following information together with the information contained under the headings “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing at the end of this prospectus.

 

    As of September 30, 2019  
    Actual     Proforma  (1)     Pro Forma as adjusted (1)  
    (Unaudited)           (Unaudited)  
(several financial statement line items excluded for presentation purposes)                        
                         
                         
Accrued Fees to a Related Party     1,531,161       (1,531,161 )      
Bank Debt     6,000,000       (4,000,000 )     2,000,000  
                         
Convertible Debt     462,500       (462,500 )      
                         
Members’ Equity (deficit):                        
  Series A preferred shares     1,894,314       (1,894,314 )      
  Series B preferred shares     2,709,775       (2,709,775 )      
  Series C preferred shares     28,110,576       (28,110,576 )      
  Series F preferred shares                  
  Common Shares     2,338,398       (2,258,398 )     100,000  
  Subscriptions Receivable     (184,656 )     184,656        
Additional Paid in Capital     4,751,541       568,459       5,300,000  
Accumulated members’ deficit     (47,215,177 )     47,215,177        
     Total members’ equity (deficit)   $ (7,595,229 )           $ 5,400,000  

 

 
(1)

In connection with the Corporate Conversion, Convertible Debt, preferred units, Series A, B, C and F common units and members’ accumulated deficit will be reduced to zero to reflect the elimination of all outstanding units and other interests in Clip Interactive, LLC and corresponding adjustments will be reflected as common stock, additional paid-in capital, stockholders’ accumulated deficit, stockholders’ accumulated other comprehensive loss and total stockholders’ equity of Auddia, Inc. The pro forma and pro forma as adjusted information is illustrative only.

 

 

 

 23 

 

 

The following table sets forth the number of shares of common stock and restricted common stock, as of September 30, 2019, that will be issued in connection with the Corporate Conversion and the consummation of this IPO to holders of our Series A, B, C, and F preferred units as well as the numbers of shares that will be reserved for issuance upon the exercise of common share purchase options and common share purchase warrants:

 

Shares of restricted common stock to be issued for:      
Series A Preferred shares     21,275  
Series B Preferred shares     22,094  
Series C Preferred shares     1,429,119  
Series F Preferred shares     1,240,144  
Conversion of Convertible Notes     812,646  
Series 1 & 2 Common Shares     2,487,536  
         
Common shares reserved for option and warrant exercise        
Options     602,633  
Warrants     1,384,553  
         
Total     8,000,000  

 

 

 

 

 

 

 

 

 

 

 

 

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DILUTION

 

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price in this IPO per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock upon consummation of this IPO. Net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the number of shares of common stock then issued and outstanding.

 

After giving effect to the Corporate Conversion, pro forma net tangible book value as of September 30, 2019 was $        , or $         per share based on                   shares of our common stock outstanding. After giving effect to our sale of                 shares of common stock in this IPO, at an assumed initial public offering price of $         per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2018 would have been $         million, or $         per share (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock). This represents an immediate and substantial dilution of $         per share to new investors purchasing common stock in this IPO. The following table illustrates this dilution per share:

 

Assumed initial public IPO price per share        $    
Pro forma net tangible book value per share as of September 30, 2019   $          
Increase in pro forma net tangible book value per share attributable to this IPO  $          
Pro forma as adjusted net tangible book value per share after giving effect to this IPO        $    
Dilution per share to new investors in this IPO        $    

 

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2019, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and to be paid by the new investors purchasing shares of common stock in this IPO, at an assumed initial public offering price of $     share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with this IPO.

 

   Shares purchased   Total consideration     Average price per  
   Number   Percent   Amount      Percent     share  
Existing investors        %   $       %     $    
New investors in this IPO        %   $       %     $    
Total        %   $       %     $    

 

Sales by the selling stockholders in the Selling Shareholder Offering will cause the number of shares held by existing stockholders to be reduced to _________ shares, or     % of the total number of shares of our fully diluted common stock outstanding after this IPO, and will increase the number of shares held by new investors to 3,000,000 shares, or    % of the total number of fully diluted shares of our common stock outstanding after this IPO.

 

 

 

 

 25 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share of common stock, would increase (decrease) total consideration paid by new investors in this IPO by $        and would increase (decrease) the average price per share paid by new investors by $        , assuming the number of shares of common stock offered, as set forth on the cover page of this prospectus, remains the same and without deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this IPO. If the underwriters exercise in full their option to purchase additional shares of our common stock in the offering, the following will occur:

 

  · the number of shares of our common stock held by new investors will increase to                 , or     % of the total number of shares of our common stock outstanding after this IPO; and
     
  · the pro forma as adjusted net tangible book value would be $        per share and the dilution to new investors in this IPO would be $        per share.

 

If the underwriters exercise their option in full to purchase 180,000 additional shares of common stock in this IPO, the pro forma as adjusted net tangible book value per share after the IPO would be $___ per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $___ per share, and the pro forma as adjusted dilution to new investors purchasing common stock in this IPO would be $___ per share.

 

We expect to require additional capital to fund our current and future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders. See “Risk Factors—Risks related to this IPO and ownership of our common stock—If you purchase shares of common stock in this IPO, you will suffer immediate dilution of your investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 26 

 

 

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 together with the “Selected financial data” section of this prospectus and our financial statements and the related notes included at the end of this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

Corporate conversion

 

We currently operate as a Colorado limited liability company, under the name Clip Interactive, LLC. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Clip Interactive, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Auddia, Inc. As a result of the Corporate Conversion, the holders of the membership interests of Clip Interactive, LLC will become holders of common stock of Auddia, Inc.

 

The purpose of the Corporate Conversion is to reorganize our structure so that the entity that is offering our common stock to the public in this IPO is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than equity interests in a limited liability company. For further information regarding the Corporate Conversion, see “Corporate Conversion.” References in this prospectus to our capitalization and other matters pertaining to our equity and shares prior to the Corporate Conversion relate to the capitalization and equity and shares of Clip Interactive, LLC, and after the Corporate Conversion, to Auddia, Inc.

 

The financial statements included elsewhere in this prospectus are those of Clip Interactive, LLC. We do not expect that the Corporate Conversion will have a material effect on the results of our core operations.

 

Results of operations

 

Years ended December 31, 2017 and 2018 and the 9 Month periods ended September ,30, 2018 and 2019

 

 

The following table summarizes our results of operations for the Twelve Months ended December 31, 2017 and 2018 and the nine month period (unaudited ) ended September 30, 2019:

 

   Year Ended December 31,   Nine Months Ended September 30,  
   2017   2018    Increase/
Decrease
   2018    2019     Increase/
Decrease
 
(in thousands)              (Unaudited)    (Unaudited)        
Revenue  $1,988   $1,468   $ (520 )   $ 1,225     $ 382     $ (843 )
                                      
Operating expenses:                                     
Direct Costs of Service   1,883    1,697    (186)    1,379      748       (631 )
Research and development   349    295    (54)    240      176       (64 )
General and administrative   943    1,568    625     1,200      1,527       327  
Sales & Marketing   451    210    (241)    168      112       (56 )
                                      
Total operating expense   3,626    3,770    144     2,987      2,563       (424 )
                                      
Loss from operations   (1,637)   (2,303)   (666)    (1,762 )     (2,181 )     (419 )
Other income (expense):   (1,081)   (1,207)   (126)    (800 )    (953 )     (153 )
                                      
Net loss  $(2,718)  $(3,510)  $(792)  $ (2,562 )   $ (3,134 )   $ (572 )

 

 

 

 

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Total revenues. Total revenues for the year ended December 31, 2018 were $1.5 million, which was a decline of $520,000 or minus 26.2%, from $1.988 million for the year ended December 31, 2017. The decrease in revenues can be attributed to (i) the loss of two major customers for our current platform, and (ii) a corresponding decrease in Advertising earned from those customers.

 

Direct Cost of Services. Direct Cost of Services decreased $185,000 or 9.6%, from $1,882,000 to $1,697,000 for the year ended December 31, 2018 compared to the year ended December 31, 2017. This decrease primarily resulted from the loss of several clients on our current platform resulting in decreased need for hosting, staff attrition of the team working on the current platform, and other related direct expenses.

 

Research and development. Research and development expenses decreased by $53,000 or 15.3%, from $348,000 for the year ended December 31, 2017 compared to $295,000 for the year ended December 31, 2018. The decrease resulted primarily from attrition in the engineering staff in 2018.

 

Sales and marketing. Sales and marketing expenses decreased by $241,000 or 53.5%, from $451,000 for the year ended December 31, 2017 compared to $209,000 for the year ended December 31, 2018, as the company reduced marketing expenses tied to the current software platform.

 

General and administrative. General and administrative expenses increased by $624,000 or 66.3%, from $942,000 for the year ended December 31, 2018 compared to $1.6 million for the period ended December 31, 2017. The increase resulted from additional contract personnel and business line research.

 

Interest expense/Other expense, net. Total Interest expense/other expense increased by $126,000, or 11.8%, from $1.1 million for the year ended December 31, 2017 to $1.2 million for year ended December 31, 2017. The increase was due almost entirely to an increase in interest expense resulting from higher interest rates on the company’s bank debt, as well as interest payments on the company’s collateral agreement.

 

Net income (loss). We had a net loss of $3.5 million for the year ended December 31, 2018 compared to a net loss of $2.7 million for the year period ended December 31, 2017. The increased loss resulted from the combination of the decrease in revenues which was not fully offset by the reduction in expenses as discussed above.

 

Nine Months ended September 30, 2018 and 2019

 

Total revenues. Total revenues for the nine months ended September 30, 2019 were $382,223, which was a decline of $842,853 or minus 68.8%, from $1,225,086 for the nine months ended September 30, 2018. The decrease in revenues can be attributed to (i) the loss of two major customers for our current platform, and (ii) a corresponding decrease in advertising earned from those customers.

 

Direct Cost of Services. Direct Cost of Services decreased $631,001 or 45.8%, from $1,378,512 to $747,510 for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. This decrease primarily resulted from the loss of several clients on our current platform resulting in decreased need for hosting, staff attrition of the team working on the current platform, and other related direct expenses.

 

Research and development. Research and development expenses decreased by $64,527 or 26.9%, from $240,284 for the nine months ended September 30, 2018 compared to $175,757 for the nine months ended September 30, 2019. The decrease resulted primarily from attrition in the engineering staff in 2019.

 

Sales and marketing. Sales and marketing expenses decreased by $56,347 or 33.5%, from $168,294 for the nine months ended September 30, 2018 compared to $111,947 for the nine months ended September 30, 2019, as the company reduced marketing expenses tied to the current software platform.

 

General and administrative. General and administrative expenses increased by $327,873 or 27.0%, from $1,200,093 for the nine months ended September 30, 2018 compared to $1,527,966 for the period ended September 30, 2019. The increase resulted primarily from additional consulting and professional fees and increased amortization of capitalized software.

 

Interest expense/Other expense, net. Total Interest expense/other expense increased by $153,096, or 19.1%, from $799,774 for the nine months ended September 30, 2018 to $952,870 for nine months ended September 30, 2019. The increase was due almost entirely to an increase in interest expense resulting from higher interest rates on the company’s bank debt, as well as interest payments on the company’s collateral agreement.

 

Net income (loss). We had a net loss of ($3,133,811) for the nine months ended September 30, 2019 compared to a net loss of ($2,561,870) for the nine months ended September 30, 2018. The increased loss resulted from the combination of the decrease in revenues which was not fully offset by the reduction in expenses as discussed above.

 

 

 

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Income taxes

 

Since our inception in 2012, we have been 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 are not viewed as a taxpaying entity in any jurisdiction and do not require a provision for income taxes. Each member of our company is responsible for the tax liability, if any, related to its proportionate share of our taxable income.

 

After consummation of this IPO, we will be treated as a corporation for U.S. income tax purposes and thus will become subject to U.S. federal, state and local income taxes and will 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 their estimated realizable value which based on our operating history we expect to provide for a full valuation allowance on any net deferred tax asset as realization is not considered more-likely-than-not.

 

We will account for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

 

Critical accounting policies and use of estimates

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.

 

While our significant accounting policies are described in more detail in the notes to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

 

 

 

 

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Revenue Recognition

 

The Company derives its revenues from two sources: (1) Platform fee revenues, which are comprised of subscription fees from customers accessing the Company’s cloud-based computing services and occasionally from customers paying a Development Fee; and (2) Advertising revenues based on impressions delivered via the Company’s Platform.

 

Revenue is recognized for promised services to customers upon satisfaction of the following criteria: persuasive evidence of an arrangement exists, the fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. The Company typically invoices its customers monthly. Typical payment terms provide that customers pay within 30 days of invoice.

 

The Company has certain agreements that are multiple-element arrangements and provide for multiple deliverables to customers. For those arrangements, the Company first determines whether each service or deliverable meets the separation criteria of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Subtopic 605-25, Revenue Recognition–Multiple-Element Arrangements. In general, a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has stand-alone value to the customer. Each deliverable that meets the separation criteria is considered a separate unit of accounting. The Company allocates the total arrangement consideration to each unit of accounting based on the relative selling price method, with discounts allocated pro rata to each individual unit of accounting. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.

 

After the arrangement consideration has been allocated to each unit of accounting, the Company applies the appropriate revenue recognition method for each unit of accounting based on the nature of the arrangement and the services included in each unit of accounting. All deliverables that do not meet the separation criteria of ASC Subtopic 605-25 are combined into one unit of accounting, and the most appropriate revenue recognition method is applied. The Company’s contracts with customers generally result in one unit of accounting.

 

The Company's contracts with customers generally provide for services over the contract term, and the Company recognizes the related revenue ratably as services are provided. The Company's contracts may also include additional billable amounts for ad placements in excess of pre-defined levels. The Company recognizes these amounts as revenue during the months in which the ad placement activity occurs.

 

We adopted ASC Topic 606, effective January 1, 2019, utilizing the modified retrospective method. This approach was applied to contracts that were not completed as of January 1, 2019, and the corresponding incremental costs of obtaining those contracts, which resulted an immaterial cumulative effect adjustment to the opening balance of accumulated deficit at date of adoption. The adoption of this ASU is expected to primarily impact our disclosures pertaining to revenue from our contracts with customers. Reported results for fiscal year 2019 will reflect the application of ASC Topic 606, while the reported results for prior fiscal years are not adjusted and continue to be reported under ASC Topic 605.

 

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 impaired and expensed during the period of such determination. Software development costs of $802,464 and $852,252 were capitalized in 2018 and 2017, respectively. Amortization of expense of capitalized software development costs were $251,342 and $85,225 for the years ended December 31, 2018 and 2017, respectively and are included in depreciation and amortization expense.

 

 

 

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Equity-based compensation

 

Certain of our employees and consultants have received grants of common units 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 units receive distributions if any in an order of priority in accordance with our limited liability company agreement.

 

We are 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 in accordance with the guidance outlined in the Practice Aid. Once a public trading market for our common stock has been established in connection with the completion of this IPO, it will no longer be necessary for us to estimate the fair value of our common stock in connection with our accounting for equity awards we may grant, as the fair value of our common stock will be its public market trading price.

 

For financial reporting purposes, we performed common unit valuations with the assistance of a third-party specialist, for the years ended December 31, 2017 and 2018.

 

Our common unit valuations were prepared using a market approach based on the most recent round of equity financing using the Option Pricing Model.

 

In addition to the executive officer and director compensation arrangements discussed above under “Compensation of Our Executive Officers and Directors,” below we describe transactions since January 1, 2017 to which we have been or will be a participant, in which the amount involved in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers or beneficial holders of more than 5% of any class of our capital stock, or 5% Security Holders, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

 

The Company has a line-of-credit with a bank. The available principal balance under the line-of-credit is $6,000,000, and the outstanding balance accrues interest at a variable rate based on the bank’s prime rate plus 1% (6.5% at September 30, 2019) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2020. The Company maintains a minimum balance at the lender to cover two months of interest payments. The line-of-credit is collateralized by all assets of the Company as well as certain cash assets of two shareholders in control accounts at the lender, one of which shareholder is Mr. Jeffrey Thramann, our Chairman of the Board. One control account has a balance of $2,000,000 and the other control account has a balance of $4,000,000 Mr. Thramann has personally guaranteed the full amount of the loan. The outstanding balance on the line-of-credit at September 30, 2019 and 2018 was $6,000,000. Upon the Conversion, the Company will issue 800,000 common shares to Mr. Thramann, in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

The fees paid by the Company to the bank on the $2,000,000 collateral arrangement with the shareholder are 33% percent of the collateral amount annually, plus there is an annual renewal fee of $50,000 and a $15,000 delayed payment fee for the first year in addition to warrants to purchase 300,000 shares of LLC common units due annually with $843,817 and $500,877 being recorded as interest expense for the years ended December 31, 2018 and 2017, respectively. During 2018 a partial payment was made on the accruing collateral fees due of $364,944. Subsequently in 2018, the shareholder subscribed to purchase 4,530,861 shares of common stock for $0.023 per share for a total of $104,210 which was offset against the interest due on the collateral arrangement. The balance outstanding on the collateral at December 31, 2018 and 2017 was $875,540 and $500,877, respectively.

 

During 2017 and 2018, the Company entered into notes payable (the "Notes") with a related party for $330,000 and $40,000, respectively. The Notes did not accrue interest and did not have a stated maturity date. The Notes were expected to be repaid as cash flow permitted. During 2018, the Notes, with an outstanding balance of $370,000, were converted into 354,576 shares of Series B preferred and subsequently converted into 3,217,065 shares of Series C preferred at $0.115 per share in connection with the Series C stock exchange.

 

 

 

 

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Liquidity and Going Concern

 

Our working capital deficiency, stockholders’ deficit and recurring losses from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements for the year ended December 31, 2018 with respect to this uncertainty. Our ability to continue as a going concern will require us to obtain additional funding. We believe that the net proceeds from this IPO and our existing cash, will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. 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.

 

Liquidity and capital resources

 

Sources of liquidity

 

To date, we have financed our operations primarily through private placements of preferred units and debt financing.

 

Through September 30, 2019, we raised an aggregate of $41,738,330 of gross proceeds from our sales of $29,370,634 of preferred and common units, $6,792,500  from loans, and $5,575,196 from revenues derived from Platform fees and related advertising revenue paid by our customers. As of September 30, 2019, we had cash of approximately $85,000, and had debt outstanding of $7.5 million.

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to invest in sales, marketing and engineering resources and bring our products to market. Furthermore, upon the closing of this IPO, we expect to incur additional costs associated with operating as a public company. While we believe that the net proceeds from this IPO and our existing cash, cash equivalents and available-for-sale securities will be sufficient to fund our current operating plans through at least the next 12 months, we anticipate that we may need additional funding to complete the development of our full product line and scale products with a demonstrated market fit.

 

Building and scaling technology products is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary user experience required to obtain market acceptance and achieve meaningful product sales. In addition, our product candidates, once developed, may not achieve commercial success. The majority of revenue will be derived from or based on sales of software products that may not be commercially available for many years, if at all. Accordingly, we will need to continue to rely on revenues from existing products and/or additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Cash flows

 

The following table summarizes our sources and uses of cash for each of the periods presented:

 

   Year ended
December 31,
   Nine Months Ended
September 30,
 
   2017   2018   2018     2019  
(in thousands)                   
Cash used in operating activities  $1,925,597   $2,296,546   $ (1,109,467 )   $ (1,406,242  
Cash provided by (used in) investing activities   (852,252)   (804,493)    (607,010 )     (578,070 )
Cash provided by financing activities   2,070,007    3,326,685     2,116,610       1,797,696  
                          
Net increase (decrease) in cash and cash equivalents  $(707,842)  $225,646   $ 400,133     $ (186,616 )

 
Investing activities

 

During the year ended December 31, 2018, investing activities used $578,070 of cash, consisting almost entirely of software capitalization.

 

During the nine months ended September 30, 2019, investing activities used $607,010 of cash, consisting entirely of software capitalization.

 

 

 

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Financing activities

 

During the year ended December 31, 2018, net cash provided by financing activities was $3,326,685, due principally to the proceeds from our sale of $2,138,545 of Preferred Units and $1,188,458 of Common Units.

 

During the year ended December 31, 2017, net cash provided by financing activities was $2,070,007, due principally to the proceeds from our sales of $258,001 of Preferred Units and $1,538,378 from the notes payable which were subsequently converted to Preferred Units.

 

During the nine months ended September 30 ,2019, net cash provided by financing activities was $1,797,696.

 

Funding requirements

 

Developing technology products is a time-consuming, expensive and uncertain process that takes years to complete and we may never generate revenue from the sale of any new products. In addition, our product candidates may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of some technology products we do not expect to be commercially available for many years, if ever. Accordingly, we may need to obtain substantial additional funds to achieve our business objectives.

 

Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity securities, your ownership interest may be diluted. Any debt or preferred equity financing, if available, may involve agreements that include restrictive covenants that may limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, which could adversely impact our ability to conduct our business, and may require the issuance of warrants, which could potentially dilute existing stockholders’ ownership interests.

 

If we raise additional funds through licensing agreements and strategic collaborations with third parties, we may have to relinquish valuable rights to our technology, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds, we may be required to delay, limit, reduce and/or terminate development of our product candidates or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Contractual obligations and commitments

 

The Company entered into a line-of-credit with a bank originally dated November 7, 2012 and amended on November 5, 2016. On April 10, 2018 the Company refinanced its line-of-credit with a different bank and amended this agreement on July 10, 2019. The available principal balance under the line-of-credit is $6,000,000, and the outstanding balance accrues interest at a variable rate based on the bank’s prime rate plus 1% (6.5% at September 30, 2019) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2020. The Company maintains a minimum balance at the lender to cover two months of interest payments. The line-of-credit is collateralized by all assets of the Company as well as certain cash assets of two shareholders in control accounts at the lender. One control account has a balance of $2,000,000 and the other control account has a balance of $4,000,000. The shareholder with the $2,000,000 control account receives a fee as described in Note 6. The shareholder with the $4,000,000 control account at the lender personally guarantees the full amount of the loan. The outstanding balance on the line-of-credit at September 30, 2019 and 2018 was $6,000,000. (see Note 4 of our Financial Statement - Line-of-Credit ).

 

The line-of-credit is collateralized by all assets of the Company as well as certain cash assets of two shareholders in control accounts at the lender, one of which shareholder is Jeffrey Thramann, our Chairman of the Board. One control account has a balance of $2,000,000 and the other control account has a balance of $4,000,000 Mr. Thramann has personally guaranteed the full amount of the loan. The outstanding balance on the line-of-credit at September 30, 2019 was $6,000,000. Upon the Conversion, the Company will issue 800,000 common shares to Mr. Thramann, in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

The fees paid by the Company to the bank on the $2,000,000 collateral arrangement with the shareholder are 33% percent of the collateral amount annually, plus there is an annual renewal fee of $50,000 and a $15,000 delayed payment fee for the first year in addition to warrants to purchase 5,028 shares of common shares due annually with $843,817 and $500,877 being recorded as interest expense for the years ended December 31, 2018 and 2017, respectively.

 

 

 

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In October 2019 the Company obtained a $400,000 non-interest bearing short term loan from a related party. The Company was advanced $200,000 net of 12,000 in closing fees and the remaining $200,000 was put into an escrow account. On December 2019, the Company made a principal payment of $57,000. The remaining $243,000 of principal and fees will be due on January 2020.

 

The following table summarizes our contractual obligations at September 30, 2019 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

 

   Payments due by period 
(in thousands)  Total   Less Than
1 Year
   1 - 3
Years
   4 - 5
Years
   More Than
5 Years
 
Operating lease commitments (1)  $117,000    117,000    -60,000-    -0-    -0- 

 

 
(1) Represents minimum payments due for the lease of office space

 

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.

 

Recently issued accounting pronouncements

 

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our financial statements appearing at the end of this prospectus, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.

 

Emerging growth company status

 

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required. Accordingly, our financial statements may not be comparable to other public companies that avail themselves of the extended transition period.

 

 

 

 

 

 

 

 

 

 

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BUSINESS

 

 

Overview of Auddia

 

The Company is a technology company headquartered in Boulder, CO that was founded in 2012. We were originally formed to provide the broadcast radio industry with digital consumer products (mobile apps and web applications) that increased radio listener engagement and generated new revenue for radio stations from synchronized audio-digital advertisements. The company is now developing new software technologies for audio media companies and consumers of audio media, more generally.

 

The Company has developed an artificial intelligence (“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, it also identifies the beginning and end of each piece of content.

 

The Company is leveraging this technology platform to bring to market a premium AM/FM radio listening experience through a product called the “Auddia App”. The Auddia App is intended to be downloaded by consumers who will pay a subscription fee and in order to listen to any streaming AM/FM radio station without commercials. Advanced features will allow consumers to skip any content heard on the station as well as use voice interface technologies to request audio content on-demand. We believe the Auddia App represents a significant differentiated audio streaming product that will be the first to come to market since the emergence of popular streaming music apps such as Pandora, Spotify, Apple Music, Amazon Music, etc. We believe that the most significant point of differentiation is that in addition to music, the Auddia App is intended to deliver non-music content that includes local sports, news, weather, traffic and the discovery of new music. Radio is the dominant audio platform for local content.

 

The Company commissioned research to to establish subscription pricing in accordance with an industry standard pricing analysis. Results of the research, which included nearly 2,000 responses, suggested $12/month as the optimal price to maximize revenue and indicated that 29% of respondents were at least likely to subscribe to the product. The majority of respondents who self-identified as being listeners to paid services such as SiriusXM and streaming music providers indicated a likely intent to purchase.. We believe this implies a preference for the local content inherent in AM/FM broadcasting.

 

The Company is currently building the minimally viable product (“MVP”) version of the Auddia App and expects to initiate the first consumer pilots with the software platform service in early 2020 with a full commercial launch to follow in the second quarter of 2020. A portion of the proceeds raised in this offering will be used to finalize the Auddia App’s readiness for national-scale deployment and for marketing related expenses for full commercial launch.

 

Overview of the Evolving Audio Ecosystem & the Positioning of AM/FM Broadcast Radio

 

We believe that audio as a medium is experiencing a renaissance as advanced artificial intelligence capabilities such as voice recognition are ushering in an era where voice is becoming the most efficient interface to interact with audio and video content. Historically, audio has been a passive medium where content is selected by a professional program director and delivered to large audiences who have no choice in personalizing the delivered content. But audio is now transitioning to an active medium where consumers can interact with streaming content through advanced algorithms and feedback mechanisms that include skipping content, providing thumbs up and thumbs down input, sharing content socially, creating playlists, following other playlists and customizing the programming of content routines for specific parts of the day through smart speakers like Alexa (e.g., providing a morning routine). Advanced artificial intelligence capabilities are facilitating these new capabilities and accelerating the trend towards consumer consumption of on-demand personalized content. To support this trend, audio content needs to be understood, indexed, stored and made retrievable through search methods so it can be provided to consumers when they ask for particular content.

 

 

 

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Broadcast radio remains the dominant force in audio. Edison Research’s “Share of Ear” study from the third quarter of 2018 shows broadcast radio with a 46% share of listening and the next most popular form of listening being streaming audio at 14%. Although AM/FM radio continues to dominate audio listening, streaming audio is the fastest growing segment according to Share of Ear studies going back to 2014. We believe streaming audio will continue to grow as on-demand content in the form of streaming music podcasting, short-form audio and other emerging formats of audio content become more prevalent and artificial intelligence technologies facilitate the introduction of new and improved listening experiences. As streaming audio has demonstrated its growth trajectory, AM/FM radio has responded by streaming their radio stations but with, we believe, very little success in comparison to the streaming music players as measured by consumer listening.

 

 

 

 

Most common streaming platforms in the U.S. offer a paid subscription model to eliminate or reduce advertisements during the listening experience. With very few exceptions, AM/FM radio has not adopted this model to date. Most AM/FM streams are simulcasts of the on-air station and carry the same advertisement load as the on-air product. In 2018, the average advertisement load was 16.1 minutes per hour. This means that if these 16.1 minutes were filled with the common 30-second spot, this would equate to 32 advertisements per hour. Given that the free ad-supported tiers of the music streaming services commonly limit ads to 4 per hour, a streaming service with 32 audio ads per hour is more disruptive to the content listening experience. We believe the combination of AM/FM radio’s advertisement load and the inability for listeners to skip content or request on-demand content in an AM/FM radio stream is the main reason broadcast radio is not gaining ground in the audio streaming market relative to the other music players.

 

The Company believes the Auddia App will give subscribers the technology solution they need to enjoy the local content presented by AM/FM radio while not only avoiding the interruption of 16.1 minutes of ads per hour, but also personalizing the listening experience with skips and on-demand content. We believe the Auddia App represents the consumer product broadcast radio needs to maintain or expand the lead it currently enjoys from a time spent listening perspective.

 

 

 

 

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Software Products and Services

  

The Auddia App

 

The Auddia App is our flagship product and is expected to generate the majority of the Company’s future revenue.

 

How the Auddia App Works

 

An Auddia subscriber will select a specific streaming radio station to record and be able to listen to that station without commercials. The Auddia App will record the station in real time and the App’s AI algorithm will identify the beginning and end of audio content segments as well as other content, including commercials. When the recorded station is played back by the Auddia App subscriber, the Auddia App will cover the commercial segments with other content such as additional music.

 

The Company is developing strategies and content relationships to access additional content sources to cover commercials and respond to skips across other content platforms such as sports, news, talk and weather. As the audio content ecosystem continues to expand, the Company believes Auddia will represent an attractive distribution platform for content providers. There is no guarantee the audio content ecosystem will continue to expand along its current trajectory or that the Company will be able to secure access to content in an economically advantageous manner, both of which would negatively impact the user experience within Auddia. The Company has not yet secured the rights from content providers to place any audio content into the Auddia platform in an on-demand use case.

 

The Auddia App is built on a proprietary artificial intelligence platform developed and owned by the Company and subject to patent applications that are currently pending. In 2018, the company built and released a music player application the Company named “PLAZE”, to demonstrate some of the capability of our technology. The PLAZE App is not a product we are currently marketing. When the PLAZE App is opened, the user selects the genres of music that are of interest and presses play. The PLAZE technology points the user to the public stream of a station that is playing a song within one of the selected genres. Each song will play from the beginning. If the song is skipped, PLAZE technology will point the user to the beginning of another song on a different stream. Skips are unlimited.

 

Although PLAZE is a commercial free music experience, it is not the commercial free AM/FM radio station experience of the Auddia App. The Auddia App requires the addition of our proprietary artificial intelligence technology to PLAZE, in addition to other technology development, prior to commercial release.

 

Copyright Law

 

The Company does not believe it requires direct licensing with copyrighted, primarily music, content. This is because the Auddia App will not “play” any music. Rather, the Auddia App subscriber will choose the public URL of a radio station that is already paying the music industry or other content providers, the statutory rate for radio set by the Copyright Review Board. As such, direct licensing with the music groups and other copyrighted content is not required.

 

The Auddia App’s architecture presents a built-in digital audio recorder (“DAR”) to take advantage of the “Fair Use” exemption to the copyright laws. The Fair Use doctrine was established by Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), also known as the “Betamax case”, is a decision by the Supreme Court of the United States which ruled that the making of individual copies of complete television shows by recording television content, for purposes of time shifting, does not constitute copyright infringement, but is “Fair Use”. The Court also ruled that the manufacturers of home video recording devices, such as Betamax or other Video Tape Recorders, cannot be liable for infringement. Auddia App’s DAR is analogous to how Digital Video Recording (“DVR”) technology leverages the Fair Use exemption to allow users to record broadcast television shows. With the Auddia App’s DAR, users are selecting radio stations to record and utilizing technology within the Auddia App to cover commercials with additional content. Case law further supporting the Fair Use exemption for digital video recording (DVR) has been established through the case of Fox Broadcasting v. Dish Network L.L.C., 723 F.3d 1067, 1067 (9th Cir. 2013), where it was held that as to a direct copyright infringement claim, the record did not establish that the provider, rather than its customers, made copies of television programs for viewing. Further, the broadcaster did not establish a likelihood of success on its claim of secondary infringement because, although it established a prima facie case of direct infringement by customers, the television provider showed that it was likely to succeed on its affirmative defense that the customers' copying was a “fair use". Although the personal use exemption has been consistently upheld by the Supreme Court, there is no guarantee the exemption will not be challenged.

  

 

 

 

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Vodacast

 

Vodacast is an interactive podcasting platform (the “Vodacast App”) the Company is building that will allow podcasters to give their audiences an interactive audio experience. Podcast listeners will be able to see video and other digital content that correlates with the podcast audio and is presented to the listener as a digital feed within the Vodacast App. All content presented in the digital feed can be synched to the podcast audio content. This allows podcast listeners to visually experience and interact with audio content in podcasts.

 

Much of the core technology we use in Vodacast to create the feed of digital content synchronized to the audio content of the podcast is fully developed and represents the core technology the Company has used historically to provide synchronized digital feeds to over 500 radio stations. Additional technology needs to be built to fully develop the Vodacast user interface.

 

Vodacast introduces a new digital revenue stream to podcasters, such as synchronized digital advertising while providing end users a new digital content channel that compliments the core audio channel of the podcast. Below are hypothetical screenshots for a generic Podcast. The image on the left is an example of a show feed while the image on the right is an example of an episode feed. Within the episode feed, digital ads can be placed to drive revenue.

  

Business Model & Customer Acquisition Strategy for Auddia and Vodacast

 

The Company has a seven-year plus history of working closely with the broadcast radio industry in the United States to help the industry adapt to both digital advertising and digital media technologies.

  

After the Company filed initial patent applications on the artificial intelligence technology for Auddia technology in January of 2018, we researched the value of the Auddia App and the importance of subscription revenue and interacted with several leading broadcasters. Based on these continuing interactions with numerous broadcast radio groups, the Company believes we will be able to utilize our existing relationships with broadcast radio to drive customer acquisition for the Auddia App.

 

The Company will continue to utilize its existing relationships with broadcasters as the primary strategy to market the Auddia App to potential subscribers. Radio stations owned by broadcasters will be economically incentivized to promote the Auddia App to their listeners. We intend to leverage subscription revenue to compensate radio broadcasters for promotional support and access to local content. We believe that if broadcasters can generate increased revenue from their content, they can decrease their on-air advertising load while increasing the price paid for each commercial, as the commercial is more likely to be heard by consumers in a less cluttered advertising environment. In addition, we intend to offer tiered subscriptions to the Auddia App where lower priced subscriptions allow a small number of advertisements. These advertisements can be targeted better than on-air ads and therefore can attract higher rates if there is a large enough audience to be targeted.

 

Our business model is based on creating a pool of subscription and advertising revenue across all streaming stations utilizing the Auddia platform. This subscription pool is expected to be shared with radio stations based on the time each listener spends listening to a station on the Auddia App We believe this business model will result in broadcasters promoting the listening of their stations on the Auddia App, similar to how radio stations are currently using air time to promote the listening of their stations on Alexa and other smart speaker systems. The Company expects radio promotion will result in an efficient customer acquisition cost in comparison to other subscription audio services.

 

The Vodacast platform will be marketed to podcasters and podcasting companies with business-to-business strategies that focus on communicating the value propositions of the Vodacast platform. The potential to earn new, incremental revenue on the Vodacast platform, in addition to the other key value propositions of the platform, is expected to organically drive podcasters to promote the platform directly to their listeners. Direct-to-consumer marketing will be done in partnership with podcasters who leverage their audio content programs to promote to their established audiences. As is the case with other, proven marketing strategies, we intend to have our partners benefit from a participative revenue share, higher ad revenue, and higher margins on advertising through the Vodacast platform.

 

 

 

 

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Our Existing Interactive Radio Platform

 

From 2014 through 2017, the Company was successful in deploying our platform across 580 major radio stations and 1.6 million monthly active users. Although this represents a meaningful user base, it is a small fraction of the listening audience represented by the 580 stations on the Company’s platform. We believe the two main reasons radio was not able to drive more users to the platform are that the number of consumers willing to download an individual radio station app is small and that to appeal to a greater digital audience the core listening experience of radio needs to incorporate a premium offering that includes skips, on-demand content and a commercial-free option.

 

The Company’s current product serves the broadcast industry by providing a platform that allows for the delivery of actionable digital ads that are synchronized with broadcast and streaming audio ads. Broadcasters offer mobile and web digital interfaces to their listeners, typically for their individual stations. Our Interactive Radio Platform provides mobile and web products that provide end users (listeners) with a visual display of everything a radio station has played in recent history (referred to as a “station feed”). In addition to displaying album art for songs played, and digital insertions for station promotions and programs (e.g., a radio station contest), the station feed also includes a digital element for each audio ad that was played. These interactive, synchronized digital ads generate additional revenue for broadcasters and allow for the collection of meaningful advertising analytics which we present to broadcasters through an analytics dashboard.

 

The Interactive Radio Platform is still operational, serving multiple broadcasters and several active radio stations. However, while this platform will remain operational, it will not be the main focus of the business going forward.

 

Intellectual Property

 

We rely on a combination of patents, trade secrets, non-disclosure agreements, and other intellectual property to protect the proprietary technologies that we believe are important to our business. Our success will depend in part on our ability to obtain and maintain patent and other proprietary protection for commercially important inventions and know-how, defend and enforce our patents, maintain our licenses, preserve our trade secrets, and operate without infringing valid and enforceable patents and other proprietary rights of third parties. We also rely on continuing technological innovation to develop, strengthen, and maintain our proprietary position in the field of interactive audio.

 

The Company holds issued patents and has patents pending in the areas of audio content monitoring, identification, distribution and presentation. The Company’s intellectual property has been used in the development of products that allow broadcasters and audio content distributors to present digital content and supplemental audio and video content along with and even synchronized with their standard audio content. These products introduce new consumer use scenarios, such as offering direct response to audio ads (such as a standard broadcast radio commercial). The products give consumers, via smartphone applications, a mechanism to identify both the content and the source of content and allow the consumer to act on what they may have heard and/or receive additional information about what they heard.

 

On March 12, 2019, the United States Patent and Technology Office issued a patent to the Company (titled “Method and System for Sub-Audible Signaling”) that covers an advanced “watermarking” technology to attach source-attribution information, as well as highly detailed content descriptors into an audio broadcast or stream. We believe this technology improves the state of the art by potentially increasing the amount of information that can be embedded in an audio stream or broadcast, as well as supporting the real time addition of sub-audio information. The Company does not utilize this patent technology in its current products, but the technology may be useful for future products or potential licensing to others. However, there can be no assurance that this patent or the technology underlying the patent will be utilized or licensed by the Company or, even if utilized or licensed, this patented technology will result in revenues or profits.

 

 

 

 

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The most recent intellectual property to be submitted for patent application is a set of technologies that are integral to the development and operation of consumer-oriented platform that can deliver commercial free broadcast radio content. These technologies involve distributed content monitoring (e.g., on the smartphones of consumers) and content identification, including the identification of the beginning and end of specific segments of content, such as a song or an ad. Combining these capabilities with time-shifting and real-time audio content replacement provides the end user with a dynamic, multi-source, commercial free audio content experience that can include the local content heard on the radio as well as any other content available form an accessible source. This intellectual property serves as the cornerstone of the company’s new focus and allows the company to eventually expand to provide numerous and various audio content sources on a single platform.

 

The Company holds trademarks and is in the process of applying for trademarks for key products and brands. The Company holds the trademark for the product named PLAZE, which is a potential commercial-free music streaming product that is a future, strategic opportunity of the business. The company has the name AUDDIA in the trademark application process and expects to receive approval within 60 days.

 

Competition

 

Our audio service offerings face competition from alternative media platforms and technologies, such as broadband wireless, satellite radio, audio broadcasting by cable television systems and internet-based streaming music services, as well as consumer products, such as portable digital audio players and other mobile devices, smart phones and tablets, gaming consoles, in-home entertainment and enhanced automotive platforms. These alternative platforms and technology are offered by much larger and well-established music service company’s such as SiriusXM. iHeart Media, Spotify, and the like. These technologies and alternative media platforms compete with our services for audience share and advertising revenues.  There can be no assurance that we will be able to compete successfully in the audio marketplace. We are a small, relatively new company and we do not currently consider the Company to be a significant participant in its industry.

 

Further, our success is dependent upon our development of new services and products for both broadcasters and consumer listeners, and there can be no assurance that we will have the resources to acquire new technologies or to introduce new services to compete with other new technologies or services. Other companies employing new technologies or services could more successfully implement such new technologies or services or otherwise increase competition with our business.

 

Employees

 

As of September 30, 2019, we had 15 total employees, 9 of whom were engaged in full-time research and development activities and 3 of whom were engaged in general administration, and 3 part-time employees. None of our employees is represented by any collective bargaining unit. We believe that we maintain good relations with our employees.

 

Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any material legal proceedings, the adverse outcome of which, in our management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position. There are no material proceedings in which any of our directors, officers or affiliates or any registered or beneficial stockholder of more than 5% of our common stock is an adverse party or has a material interest adverse to our interest.

 

 

 

 

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MANAGEMENT

 

Executive officers and directors

 

Set forth below are the names, ages and positions of our executive officers and directors.

 

Name

  Age  

Position(s) held

Served as a Director and/or Officer Since

Executive Officers          
Jeffrey Thramann, M.D.   55   Director and Chairman of the Board 2012
Michael Lawless (1)   56   Chief Executive Officer & Director 2012
Peter Shoebridge   56   Chief Technology Officer 2013
Richard Liebman   64   Chief Financial Officer 2019
           
Non-Employee Directors          
           
Stephen Deitsch(1)   48   Director 2019
James Booth(1)   52   Director 2019

 

(1) Messrs. Deitsch, Lawless, and Booth have been appointed as directors commencing as of the date of this Prospectus

 

Executive officers

 

Jeff Thramann, Chairman of the Board. Dr. Thramann founded the Company in 2011 and oversees strategic initiatives, capitalization and governance at the company. This includes day-to-day involvement in working with management to establish the vision of the company, prioritizing product launches and the pursuit of business development activities. It also includes leading efforts to secure capital for the Company, building the board of directors and leading board meetings. In 2002, Dr. Thramann was the founder and became the chairman of Lanx, LLC. Lanx was an innovative medical device company focused on the spinal implant market and created the interspinous process fusion space with the introduction of its patented Aspen product. Lanx was sold to Biomet, Inc., an international orthopedic conglomerate, in 2013. Concurrent with Lanx, in 2006 Dr. Thramann was also the founder and chairman of ProNerve, LLC. ProNerve was a healthcare services company that provided monitoring of nerve function during high risk surgical procedures affecting the brain and spinal cord. ProNerve was sold to Waud Capital Partners, a private equity firm, in 2012.

 

Prior to ProNerve and concurrent with Lanx, Dr. Thramann was the founder and chairman of U.S. Radiosurgery (USR). USR is a healthcare services company that provides advanced radiosurgical treatments for tumors throughout the body. USR became the largest provider of robotic guided CyberKnife treatments of such tumors in the U.S. and was sold to Alliance Healthcare Services (Nasdaq; AIQ) in 2011. From 2001 through 2008, Thramann was the founder and senior partner of Boulder Neurosurgical Associates, a neurosurgical practice serving Boulder County, Colorado. Dr. Thramann is the named inventor on over 50 U.S. and international issued and pending patents. He completed his neurosurgical residency and complex spinal reconstruction fellowship at the Barrow Neurological Institute in Phoenix, AZ, in 2001. He is a graduate of Cornell University Medical College in New York City and earned his Bachelors in Science degree in electrical engineering management at the U. S. Military Academy in West Point, NY.

 

Michael Lawless, Chief Executive Officer: Mr. Lawless is a technology startup veteran having held key leadership positions in Research and Development, engineering, product development and operations. Prior to joining the Company in 2012, From 2009 to 2011 he was one of the founding executives and Chief Operating Officer of Trada, Inc., a company engaged in the business of crowdsourced digital ad campaign creation and management. In addition to establishing the business operations and processes for Trada, he was responsible for building and managing the product team and operating their internet advertising marketplace SaaS product. He earned a BS in Human Factors Engineering from the U.S. Air Force Academy and his master’s degree in Experimental Psychology with an emphasis on Human-Computer Interaction from The University of Dayton.

 

 

 

 

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Peter Shoebridge, Chief Technology Officer: Mr. Shoebridge joined us in 2013, and has over 35 years of professional experience in the software development industry. He has been involved with internet related technologies since 1996. From 2008 to 2012, he was the CEO and co-founder of Blue Yonder Gaming, Corp., a casino gaming systems and gaming company. Prior to Blue Yonder he was Vice President of engineering at Sona Mobile, Inc and led the team that built the first wireless gaming system to receive federal regulatory approval. He also led the team that built the Sona Gaming System, a server-based gaming platform. Mr. Shoebridge has worked in many different technology sectors including the real-time financial industry, casino gaming including bingo systems, accounting and automotive. He was educated in London, England.

 

Richard Liebman, Chief Financial Officer: Mr. Liebman has over 25 years of financial management experience. He has been the Chief Financial Officer of two public companies, ServiceWare Technologies and Migo Software. Since 2011, he has been an independent financial and accounting consultant, in which role he has served as CFO for numerous private technology companies. He has previously served on the Board of Directors of two public companies, Vital Signs, Inc. and Psicor. Earlier in his career, he was an Investment Banker in the Corporate Finance groups of Oppenheimer & Co., and L.F. Rothschild, Unterberg Towbin. He received his M.B.A. at Columbia Business School and his undergraduate degree at Brown University.

 

Stephen M. Deitsch Director: Mr. Deitsch has extensive strategic, operational, and financial leadership experience at both publicly traded and privately held companies. From April 2017 to August 2019, Mr. Deitsch served as Senior Vice President and Chief Financial Officer of BioScrip, Inc. (Nasdaq: “BIOS”), which is now part of Option Care Health, Inc. (Nasdaq: “BIOS”). From August 2015 to April 2017, Mr. Deitsch served as Executive Vice President, Chief Financial Officer and Corporate Secretary of Coalfire, Inc., a leading cyber-security firm owned by The Carlyle Group. Mr. Deitsch served as the Chief Financial Officer of the Zimmer Biomet Spine, Bone Healing, and Microfixation business from July 2014 to July 2015 and as Vice President Finance, Biomet Corporate Controller from February 2014 to July 2014. Mr. Deitsch was the Chief Financial Officer of Lanx from September 2009 until it was acquired by Biomet in October 2013. From 2002 to 2009, Mr. Deitsch also served in various senior financial leadership roles at Zimmer Holdings, Inc. (now part of Zimmer Biomet, Inc.), including Vice President Finance, Reconstructive and Operations, and Vice President Finance, Europe. Mr. Deitsch has been a director of Green Sun Medical, a privately held medical device company, since October 2017.

 

James Booth Director: Mr. Booth is the Chief Operating Officer of Sphero, which develops physical robotic toys, digital apps, and entertainment experiences for children. He currently oversees operations, sales, marketing and business development at Sphero. Mr. Booth has helped the company achieve numerous critical milestones as a venture-backed startup. These include the company’s flagship product launch at the 2011 Consumer Electronic Show, launch of the #1 selling StarWars BB-8 robot in retail, and the development of the Sphero’s education business. During his time at Sphero, Mr. Booth helped lead the acquisition and integration of three companies. Prior to Sphero, Mr. Booth’s entrepreneurial experience includes positions at Rally Software and three early stage startups in operations, business development, and founder roles. He began his corporate career at FedEx as an Engineer and Manager of Strategic Alliances. Mr. Booth is an active mentor to companies in Techstars, Patriot Bootcamp, as well as other startups. He is a 1990 graduate of the U.S. Military Academy in West Point, NY and served in combat operations in the Middle East as an Army Officer.

 

Composition of the Board of Directors

 

At the conclusion of this offering, our board will consist of 4 members, each of whom serves as a director pursuant to the board composition provisions of our Fourth Amended and Restated LLC Agreement, or the LLC Agreement, of Clip Interactive, LLC. The LLC Agreement will terminate upon our Corporate Conversion and, thereafter, our directors will be elected by vote of our common stockholders. The Company is currently searching for an additional independent director and intends to appoint such director prior to the end of 2019.

 

 

 

 

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Director independence

 

Applicable Nasdaq rules require a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Nasdaq independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

Our board of directors has determined that all members of the board of directors, except Jeffrey Thramann and Michael Lawless are independent directors, as defined under applicable Nasdaq rules. In making such determination, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances that our board of directors deemed relevant in determining his or her independence, including the beneficial ownership of our common stock by each non-employee director.

 

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we expect that the composition of our committees will comply with all applicable requirements of Nasdaq and the rules and regulations of the SEC. There are no family relationships among any of our directors or executive officers.

 

Our bylaws, which will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part, will provide that the authorized number of directors may be changed only by resolution approved by a majority of our board of directors.

 

Role of our board of directors in risk oversight

 

One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure. Our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory requirements. Our compensation committee evaluates risks associated with our compensation practices and policies.

 

Committees of our board of directors

 

Audit committee

 

Our audit committee consists of Steven Deitsch and James Booth with Steven Deitsch serving as chair of the audit committee. Our board of directors has determined that each of these individuals meets the independence requirements of the Sarbanes-Oxley Act, Rule 10A-3 under the Exchange Act, and the applicable listing standards of the Nasdaq. Each member of our audit committee can read and understand fundamental financial statements in accordance with the Nasdaq audit committee requirements. In arriving at this determination, the board has examined each audit committee member’s employment and other experience. Our board of directors has determined that Steven Deitsch qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of the Nasdaq listing rules. In making this determination, our board has considered Ms. Sullivan’s formal education and previous and current experience in financial roles. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.

 

 

 

 

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The functions of our audit committee include, among other things:

 

  ·   evaluating the performance, independence and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors;

 

  ·   reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services;

 

  ·   monitoring the rotation of partners of our independent auditors on our engagement team as required by law;

 

  ·   prior to engagement of any independent auditor, and at least annually thereafter, reviewing relationships that may reasonably be thought to bear on their independence, and assessing and otherwise taking the appropriate action to oversee the independence of our independent auditor;
       
  ·   reviewing our annual and quarterly financial statements and reports, including the disclosures contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent auditors and management;

 

  ·   reviewing with our independent auditors and management any significant issues that arise regarding accounting principles and financial statement presentation and matters concerning the scope, adequacy and effectiveness of our financial controls;

 

  ·   reviewing with management and our auditors any earnings announcements and other public announcements regarding material financial developments;

 

  ·   establishing procedures for the receipt, retention and treatment of complaints received by us regarding financial controls, accounting or auditing matters and other matters;

 

  ·   preparing the audit committee report that the SEC requires in our annual proxy statement;

 

  ·   reviewing and providing oversight of any related-person transactions in accordance with our related-person transaction policy and reviewing and monitoring compliance with legal and regulatory requirements, including our code of business conduct and ethics;

 

  ·   reviewing our major financial risk exposures, including the guidelines and policies to govern the process by which risk assessment and risk management is implemented;

 

  ·   reviewing on a periodic basis our investment policy; and

 

  ·   reviewing and evaluating on an annual basis the performance of the audit committee and the audit committee charter.

 

We believe that the composition and functioning of our audit committee complies with all applicable requirements of the Sarbanes-Oxley Act and all applicable SEC and Nasdaq rules and regulations.

 

 

 

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Compensation committee

 

Our compensation committee consists of Steven Deitsch, and James Booth, with Mr. Deitsch serving as chair of the compensation committee. Each of these individuals is a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act, and each of Steven Deitsch, and James Booth is an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Our board of directors has determined that each of these individuals is independent as defined under the applicable listing standards of Nasdaq, including the standards specific to members of a compensation committee. The functions of our compensation committee include, among other things:

 

  ·   reviewing, modifying and approving or making recommendations to the full board of directors regarding our overall compensation strategy and policies;

 

  ·   reviewing, modifying and approving or making recommendations to the full board of directors regarding the compensation and other terms of employment of our chief executive officer or our other executive officers;

 

  ·   reviewing, modifying and approving or making recommendations to the full board of directors regarding performance goals and objectives relevant to the compensation of our executive officers and assessing their performance against these goals and objectives;

 

  ·   reviewing and approving or making recommendations to the full board of directors regarding the equity incentive plans, compensation plans and similar programs advisable for us, as well as modifying, amending or terminating existing plans and programs;

 

  ·   evaluating risks associated with our compensation policies and practices and assessing whether risks arising from our compensation policies and practices for our employees are reasonably likely to have a material adverse effect on us;

 

  ·   reviewing and making recommendations to the full board of directors regarding the type and amount of compensation to be paid or awarded to our independent board members;

 

  ·   establishing policies with respect to votes by our stockholders to approve executive compensation to the extent required by the Exchange Act and, if applicable, determining our recommendations regarding the frequency of advisory votes on executive compensation;

 

  ·   reviewing and assessing the independence of compensation consultants, legal counsel and other advisors to the compensation committee as required by the Exchange Act;

 

  ·   administering our equity incentive plans;

 

  ·   establishing policies with respect to our equity compensation arrangements;

 

  ·   reviewing the competitiveness of our executive compensation programs and evaluating the effectiveness of our compensation policies and strategy in achieving expected benefits to us;

 

  ·   reviewing and making recommendations to the full board of directors regarding the terms of any employment agreements, severance arrangements, change in control protections and any other compensatory arrangements for our executive officers;

 

  ·   reviewing with management and approving our disclosures under the caption “Compensation Discussion and Analysis” as may be applicable in our periodic reports or proxy statements to be filed with the SEC, to the extent such caption is included in any such report or proxy statement;

 

  ·   preparing the compensation committee report that the SEC requires in our annual proxy statement; and

 

  ·   reviewing and evaluating on an annual basis the performance of the compensation committee and the compensation committee charter.

 

 

 

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We believe that the composition and functioning of our compensation committee complies with all applicable requirements of the Sarbanes-Oxley Act, and all applicable SEC and Nasdaq rules and regulations.

 

Nominating and corporate governance committee

 

Our nominating and corporate governance committee consists of Jeffrey Thramann, Stephen Deitsch and James Booth, with Jeffrey Thramann serving as chair of the nominating and corporate governance committee. Our board of directors has determined that each of these individuals is independent as defined under the applicable listing standards of NASDAQ and SEC rules and regulations. The functions of our nominating and corporate governance committee include, among other things:

 

  ·   determining the minimum qualifications for service on our board of directors;

 

  ·   evaluating director performance on the board and applicable committees of the board and determining whether continued service on our board is appropriate;

 

  ·   identifying, evaluating, nominating and recommending candidates for membership on our board of directors;

 

  ·   evaluating nominations by stockholders of candidates for election to our board of directors;

 

  ·   considering and assessing the independence of members of our board of directors;

 

  ·   developing a set of corporate governance policies and principles and recommending to our board of directors any changes to such policies and principles;

 

  ·   overseeing, at least annually, the self-evaluation process of the board of directors and its committees;

 

  ·   overseeing our code of business conduct and ethics and approving any waivers thereof;

 

  ·   considering questions of possible conflicts of interest of directors as such questions arise; and

 

  ·   reviewing and evaluating on an annual basis the performance of the nominating and corporate governance committee and the nominating and corporate governance committee charter.

 

We believe that the composition and functioning of our nominating and corporate governance committee complies with all applicable requirements of the Sarbanes-Oxley Act, and all applicable SEC and Nasdaq rules and regulations.

 

Compensation committee interlocks and insider participation

 

None of the current members of our compensation committee has ever been an executive officer or employee of ours. None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

 

Code of business conduct and ethics

 

Prior to the completion of this IPO, we will adopt a Code of Business Conduct and Ethics, or the Code of Conduct, applicable to directors, executive officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Conduct will be available on the Investor Relations portion of our website at www.auddia.com. The nominating and corporate governance committee of our board of directors will be responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of Nasdaq concerning any amendments to, or waivers of, any provision of the Code of Conduct.

 

 

 

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COMPENSATION OF OUR EXECUTIVE OFFICERS AND DIRECTORS

 

Named Executive Officers

 

Our named executive officers, or the Named Executive Officers, for the year ended December 31, 2018, are:

 

  ·   Jeffrey Thramann, our Executive Chairman;
       
  ·   Michael Lawless, our Chief Executive Officer
       
  ·   Peter Shoebridge, our Chief Technical Officer

 

Compensation of our Named Executive Officers

 

Summary Compensation Table Year Ended December 31, 2018

 

The following table contains information about the compensation paid to or earned by each of our Named Executive Officers during the most recently completed fiscal year.

 

 

Name and Principal Position

  Year   Salary
($)
  Bonus
($)
  Stock
Awards
($)
  All Other
Compensation
($)
  Total
($)
 
Jeffrey Thramann -Chairman of the Board   2018   22,000   -0-   -0-   20,231   42,231  
    2017   24,000   -0-   -0-   18,671   42,671  
    2016   24,000   -0-   -0-   16,471   40,471  
                           
Michael Lawless   2018   157,050   -0-   -0-   20,231   177,281  
    2017   157,050   -0-   -0-   18,671   189,671  
    2016   177,333   -0-   -0-   16,470   193,803  
                           
Peter Shoebridge   2018   151,883   -0-   -0-   12,103   163,986  
    2017   153,000   -0-   -0-   12,186   165,186  
    2016   158,667   -0-   -0-   11,226   169,892  

 

Employment Agreement with Mr. Lawless

 

On February 6, 2012, we entered into an employment agreement with Mr. Lawless. The employment agreement provided for an annual base salary of $157,050 as well as an entitlement to an annual incentive bonus, upon certain conditions, in an amount determined by our board of directors.

  

Employment Agreement with Mr. Shoebridge

 

On April 1, 2014, we entered into an employment agreement with Mr. Shoebridge. The employment agreement provided for initial annual base salary of $151,833 as well as an entitlement, upon certain conditions to an annual incentive bonus in an amount determined by our board of directors. The employment agreement is terminable by either part at will. In connection with the employment agreement, Mr. Shoebridge was issued options to purchase 83,333 shares of common stock.

 

 

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Outstanding Equity Awards at September 30, 2019

 

The following table sets forth information regarding equity awards held by our Named Executive Officers as of September 30, 2019.

 

         
Name  Number of shares
or units that have
not vested (#)
   Market value of shares or units that
have not vested ($)(1)
 
Peter Shoebridge   1,191    $28.94 

________________________

(1) Calculated based on an independent third-party valuation.

 

Equity Incentive Plans

 

Clip Interactive, LLC Amended and Restated Equity Incentive Plan

 

We maintain the Clip Interactive, LLC Amended and Restated Equity Incentive Plan, or the Existing Plan, under which we may grant 649,115 Units of the Company to our employees, consultants and other service providers. We will cease granting awards under the Existing Plan upon the implementation of the 2019 Plan, described below.

 

Our board of managers administers the Existing Plan. The board of managers is authorized to grant awards to eligible employees, consultants and other service providers. We have frozen the Existing Plan in connection with this IPO. No further awards will be granted under the Existing Plan, but awards granted prior to the freeze date will continue in accordance with their terms and the terms of the Existing Plan.

 

The aggregate number of Units that may be issued under the Existing Plan may not exceed 649,115 Units. All of our current employees, consultants and other service providers are eligible to be granted awards under the Existing Plan. Eligibility for awards under the Existing Plan is determined by the board of managers in its discretion.

 

The board of managers may terminate or amend the Existing Plan at any time, subject to such approvals of the holders of the Company’s units as may be required pursuant to the terms of the LLC Agreement.

 

2019 Equity Incentive Plan

 

In anticipation of this IPO, our board of managers has adopted the Auddia, Inc. 2019 Equity Incentive Plan, or 2019 Plan, contingent upon the consummation of this IPO. Our unitholders have approved the 2019 Plan contingent upon the consummation of this IPO. We believe that a new Equity Incentive Plan is appropriate in connection with an initial public offering of our common stock not only to continue to enable us to grant awards to management to reward and incentivize their performance and retention, but also to have a long-term equity plan that is appropriate for us as a public company.

 

The material terms of the 2019 Plan are summarized below. The following summary is qualified in its entirety by reference to the complete text of the 2019 Plan, a copy of which will be filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Administration of the plan

 

Our board of managers has appointed the compensation committee of our board of directors as the committee under the 2019 Plan with the authority to administer the 2019 Plan. We refer to our board of directors or compensation committee, as applicable, as the Administrator. The Administrator is authorized to grant awards to eligible employees, consultants and non-employee directors.

 

 

 

 

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Number of authorized shares and award limits

 

The aggregate number of our shares of common stock that may be issued or used for reference purposes under the 2019 Plan may not exceed 1,500,000 shares (subject to adjustment as described below). Our shares of common stock that are subject to awards will be counted against the overall limit as one share for every share granted or covered by an award. If any award is cancelled, expires or terminates unexercised for any reason, the shares covered by such award will again be available for the grant of awards under the 2019 Plan, except that any shares that are not issued as the result of a net exercise or settlement or that are used to pay any exercise price or tax withholding obligation will not be available for the grant of awards. Shares of common stock that we repurchase on the open market with the proceeds of an option exercise price also will not be available for the grant of awards. Awards that may be settled solely in cash will not be deemed to use any shares.

 

The maximum number of our shares of common stock that may be subject to any award of stock options, any restricted stock or other stock-based award denominated in shares that may be granted under the 2019 Plan during any fiscal year to each employee or consultant is 150,000 shares per type of award; provided that the maximum number of our shares of common stock for all types of awards during any fiscal year is 150,000 shares per each employee, consultant or director. The maximum number of our shares of common stock that may be granted pursuant to awards under the 2019 Plan during any fiscal year to any non-employee director is 150,000 shares. In addition, the maximum grant date value of any other stock-based awards denominated in cash and the maximum payment under any performance-based cash award granted under the 2019 Plan payable with respect to any fiscal year to an employee or consultant is $200,000.

 

The foregoing individual participant limits are cumulative; that is, to the extent that shares of common stock that may be granted to an individual in a fiscal year are not granted, the number of shares of common stock that may be granted to such individual is increased in the subsequent fiscal years during the term of the 2019 Plan until used. In addition, the foregoing limits (other than the limit on the maximum number of our shares of common stock for all types of awards during any fiscal year) will not apply (i) to options, restricted stock or other stock-based awards that constitute “restricted property” under Section 83 of the Code to the extent granted during the reliance period (as described below), or (ii) to performance-based cash awards or other types of other stock-based awards to the extent paid or otherwise settled during the reliance period.

 

For companies that become public in connection with an initial public offering, the deduction limit under Section 162(m) does not apply during a “reliance period” under the Treasury Regulations under Section 162(m) until the earliest of: (i) the expiration of the 2018 Plan, (ii) the date the 2019 Plan is materially amended for purposes of Treasury Regulation Section 1.162-27(h)(1)(iii); (iii) the date all shares of common stock available for issuance under the 2019 Plan have been allocated; or (iv) the date of the first annual meeting of our stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering occurs, such period is referred to herein as the reliance period.

 

The Administrator will, in accordance with the terms of the 2019 Plan, make appropriate adjustments to the above aggregate and individual limits (other than cash limitations), to the number and/or kind of shares or other property (including cash) underlying awards and to the purchase price of shares underlying awards, in each case, to reflect any change in our capital structure or business by reason of any stock split, reverse stock split, stock dividend, combination or reclassification of shares, any recapitalization, merger, consolidation, spin off, split off, reorganization or any partial or complete liquidation, any sale or transfer of all or part of our assets or business, or any other corporate transaction or event that would be considered an “equity restructuring” within the meaning of FASB ASC Topic 718. In addition, the Administrator may take similar action with respect to other extraordinary events.

 

Eligibility and participation

 

All of our current and prospective employees and consultants, as well as our non-employee directors, are eligible to be granted non-qualified stock options, restricted stock, performance-based cash awards and other stock-based awards under the 2019 Plan. Only our and our subsidiaries’ employees are eligible to be granted incentive stock options, or (“ISOs”), under the 2019 Plan. Eligibility for awards under the 2019 Plan is determined by the Administrator in its discretion. In addition, each member of our board of directors who is not an employee of the company or any of our affiliates is expected to be eligible to receive awards under the 2019 Plan.

 

 

 

 

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Types of awards

 

Stock options. The 2019 Plan authorizes the Administrator to grant ISOs to eligible employees and non-qualified stock options to purchase shares to employees, consultants, prospective employees, prospective consultants and non-employee directors. The Administrator will determine the number of shares of common stock subject to each option, the term of each option, the exercise price (which may not be less than the fair market value of the shares of common stock at the time of grant, or 110% of fair market value in the case of ISOs granted to 10% stockholders), the vesting schedule and the other terms and conditions of each option. Options will be exercisable at such times and subject to such terms as are determined by the Administrator at the time of grant. The maximum term of options under the 2019 Plan is ten years (or five years in the case of ISOs granted to 10% stockholders). Upon the exercise of an option, the participant must make payment of the full exercise price, either in cash or by check, bank draft or money order; solely to the extent permitted by law and authorized by the Administrator, through the delivery of irrevocable instructions to a broker, reasonably acceptable to us, to promptly deliver to us an amount equal to the aggregate exercise price; or on such other terms and conditions as may be acceptable to the Administrator (including, without limitation, the relinquishment of options or by payment in full or in part in the form of shares of common stock).

 

Restricted stock. The 2019 Plan authorizes the Administrator to grant restricted stock. Recipients of restricted stock enter into an agreement with us subjecting the restricted stock to transfer and other restrictions and providing the criteria or dates on which such awards vest and such restrictions lapse. The restrictions on restricted stock may lapse and the awards may vest over time, based on performance criteria or other factors (including, without limitation, performance goals that are intended to comply with the performance-based compensation exception under Section 162(m), as discussed below), as determined by the Administrator at the time of grant. Except as otherwise determined by the Administrator, a holder of restricted stock has all of the attendant rights of a stockholder including the right to receive dividends, if any, subject to and conditioned upon vesting and restrictions lapsing on the underlying restricted stock, the right to vote shares and, subject to and conditioned upon the vesting and restrictions lapsing for the underlying shares, the right to tender such shares. However, the Administrator may in its discretion provide at the time of grant that the right to receive dividends on restricted stock will not be subject to the vesting or lapsing of the restrictions on the restricted stock.

 

Other stock-based awards. The 2019 Plan authorizes the Administrator to grant awards of shares of common stock and other awards that are valued in whole or in part by reference to, or are payable in or otherwise based on, shares of common stock, including, but not limited to, shares of common stock awarded purely as a bonus and not subject to any restrictions or conditions; shares of common stock in payment of the amounts due under an incentive or performance plan sponsored or maintained by us or an affiliate; stock appreciation rights; stock equivalent units; restricted stock units; performance awards entitling participants to receive a number of shares of common stock (or cash in an equivalent value) or a fixed dollar amount, payable in cash, stock or a combination of both, with respect to a designated performance period; or awards valued by reference to book value of our shares of common stock. In general, other stock-based awards that are denominated in shares of common stock will include the right to receive dividends, if any, subject to and conditioned upon vesting and restrictions lapsing on the underlying award, but the Administrator may in its discretion provide at the time of grant that the right to receive dividends on a stock-denominated award will not be subject to the vesting or lapsing of the restrictions on the performance award.

 

Performance-based cash awards

 

The 2019 Plan authorizes the Administrator to grant cash awards that are payable or otherwise based on the attainment of pre-established performance goals during a performance period. As noted above, following the Reliance Period, performance-based cash awards granted under the 2019 Plan that are intended to satisfy the performance-based compensation exception under Code Section 162(m) will vest based on attainment of specified performance goals established by the Administrator. These performance goals will be based on the attainment of a certain target level of, or a specified increase in (or decrease where noted), criteria selected by the Administrator.

 

Such performance goals may be based upon the attainment of specified levels of company, affiliate, subsidiary, division, other operational unit, business segment or administrative department performance relative to the performance of other companies. The Administrator may designate additional business criteria on which the performance goals may be based or adjust, modify or amend those criteria, to the extent permitted by Section 162(m). Unless the Administrator determines otherwise, to the extent permitted by Section 162(m), the Administrator will disregard and exclude the impact of special, unusual or non-recurring items, events, occurrences or circumstances; discontinued operations or the disposal of a business; the operations of any business that we acquire during the fiscal year or other applicable performance period; or a change in accounting standards required by generally accepted accounting principles or changes in applicable law or regulations.

 

 

 

 

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Effect of certain transactions; Change in control

 

In the event of a change in control, as defined in the 2019 Plan, except as otherwise provided by the Administrator, unvested awards will not vest. Instead, the Administrator may, in its sole discretion provide that outstanding awards will be: assumed and continued; purchased based on the price per share paid in the change in control transaction (less, in the case of options and stock appreciation rights (“SARs”), the exercise price), as adjusted by the Administrator for any contingent purchase price, escrow obligations, indemnification obligations or other adjustments to the purchase price; and/or in the case of stock options or other stock-based appreciation awards where the change in control price is less than the applicable exercise price, cancelled. However, the Administrator may in its sole discretion provide for the acceleration of vesting and lapse of restrictions of an award at any time including in connection with a change in control.

 

Non-transferability of awards

 

Except as the Administrator may permit, at the time of grant or thereafter, awards granted under the 2018 Plan are generally not transferable by a participant other than by will or the laws of descent and distribution. Shares of common stock acquired by a permissible transferee will continue to be subject to the terms of the 2019 Plan and the applicable award agreement.

 

Term

 

Awards under the 2019 Plan may not be made after January 1, 2029, but awards granted prior to such date may extend beyond that date. We may seek stockholder reapproval of the performance goals in the 2019 Plan. If such stockholder approval is obtained, on or after the first stockholders’ meeting in the fifth year following the year of the last stockholder approval of the performance goals in the 2019 Plan, awards under the 2019 Plan may be based on such performance goals in order to qualify for the “performance-based compensation” exception under Section 162(m).

 

Amendment and termination

 

Subject to the rules referred to in the balance of this paragraph, our board of directors or the Administrator (to the extent permitted by law) may at any time amend, in whole or in part, any or all of the provisions of the 2019 Plan, or suspend or terminate it entirely, retroactively or otherwise. Except as required to comply with applicable law, no such amendment, suspension or termination may reduce the rights of a participant with respect to awards previously granted without the consent of such participant. In addition, without the approval of stockholders, no amendment may be made that would: increase the aggregate number of shares of common stock that may be issued under the 2019 Plan; increase the maximum individual participant share limitations for a fiscal year or year of a performance period; change the classification of individuals eligible to receive awards under the 2019 Plan; extend the maximum term of any option; reduce the exercise price of any option or SAR or cancel any outstanding “in-the-money” option or SAR in exchange for cash; substitute any option or SAR in exchange for an option or SAR (or similar other award) with a lower exercise price; alter the performance goals; or require stockholder approval in order for the 2019 Plan to continue to comply with Section 162(m) or Section 422 of the Code.

 

 

 

 

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Federal income tax implications of the incentive plans

 

The federal income tax consequences arising with respect to awards granted under the Existing Plan and 2019 Plan will depend on the type of award. From the recipients’ standpoint, as a general rule, ordinary income will be recognized at the time of payment of cash, or delivery of actual shares. Future appreciation on shares held beyond the ordinary income recognition event will be taxable at capital gains rates when the shares are sold. We, as a general rule, will be entitled to a tax deduction that corresponds in time and amount to the ordinary income recognized by the recipient, and we will not be entitled to any tax deduction in respect of capital gain income recognized by the recipient. Exceptions to these general rules may arise under the following circumstances: (i) if shares, when delivered, are subject to a substantial risk of forfeiture by reason of failure to satisfy any employment or performance-related condition, ordinary income taxation and our tax deduction will be delayed until the risk of forfeiture lapses (unless the recipient makes a special election to ignore the risk of forfeiture); (ii) if an employee is granted an ISO, no ordinary income will be recognized, and we will not be entitled to any tax deduction, if shares acquired upon exercise of the ISO are held longer than the later of one year from the date of exercise and two years from the date of grant; (iii) for awards granted after the reliance period, we may not be entitled to a tax deduction for compensation attributable to awards granted to one of our Named Executive Officers (other than our Chief Financial Officer), if and to the extent such compensation does not qualify as “performance-based” compensation under Section 162(m), and such compensation, along with any other non-performance-based compensation paid in the same calendar year, exceeds $1 million; and (iv) an award may be taxable at 20% above ordinary income tax rates at the time it becomes vested, even if that is prior to the delivery of the cash or stock in settlement of the award, if the award constitutes “deferred compensation” under Section 409A of the Code, and the requirements of Section 409A of the Code are not satisfied. The foregoing provides only a general description of the application of federal income tax laws to certain awards under the Incentive Plans, and is not intended as tax guidance to participants in the Incentive Plans, as the tax consequences may vary with the types of awards made, the identity of the recipients and the method of payment or settlement. This summary does not address the effects of other federal taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local, or foreign tax laws.

 

Non-employee director compensation

 

Following the consummation of this IPO, we intend to implement a director compensation program pursuant to which our non-employee directors will receive the following compensation for their service on our board of directors:

 

  ·   No annual retainer, but a reimbursement of actual travel and lodging expenses;

 

  ·   An annual grant of stock options and other compensation to be determined by the board of directors.

 

 

 

 

 

 

 

 

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CERTAIN RELATIONSHIPS AND RELATED-PERSON TRANSACTIONS

 

In addition to the executive officer and director compensation arrangements discussed above under “Compensation of our executive officers and directors,” below we describe transactions since January 1, 2017 to which we have been or will be a participant, in which the amount involved in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers or beneficial holders of more than 5% of any class of our capital stock, or 5% Security Holders, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

 

The Company has a line-of-credit with a bank. The available principal balance under the line-of-credit is $6,000,000, and the outstanding balance accrues interest at a variable rate based on the bank’s prime rate plus 1% (6.5% at September 30, 2019) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2020. The Company maintains a minimum balance at the lender to cover two months of interest payments. The line-of-credit is collateralized by all assets of the Company as well as certain cash assets of two shareholders in control accounts at the lender, one of which shareholder is Jeffrey Thramann, our Chairman of the Board. One control account has a balance of $2,000,000 and the other control account has a balance of $4,000,000 Mr. Thramann has personally guaranteed the full amount of the loan. The outstanding balance on the line-of-credit at December 31, 2018 and 2017 and September 30, 2019 was $6,000,000. Upon the Corporate Conversion, the Company will issue 800,000 common shares to Mr. Thramann, in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

The fees paid by the Company to the bank on the $2,000,000 collateral arrangement with the shareholder are 33% percent of the collateral amount annually, plus there is an annual renewal fee of $50,000 and a $15,000 delayed payment fee for the first year in addition to warrants to purchase 300,000 shares of LLC common units due annually with $843,817 and $500,877 being recorded as interest expense for the years ended December 31, 2018 and 2017, respectively. During 2018 a partial payment was made on the accruing collateral fees due of $364,944. Subsequently in 2018, the shareholder subscribed to purchase 4,530,861 shares of common stock for $0.023 per share for a total of $104,210 which was offset against the interest due on the collateral arrangement. The balance outstanding on the collateral at December 31, 2018 and 2017 was $875,540 and $500,877, respectively. Upon the Conversion, the Company will issue 800,000 common shares to Mr. Thramann, in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

During 2017 and 2018, the Company entered into notes payable (the "Notes") with Mr. Thramann for $330,000 and $100,000, respectively, $60,000 of the $100,000 was repaid in 2018. The Notes did not accrue interest and did not have a stated maturity date. The Notes were expected to be repaid as cash flow permitted. During 2018, the Notes, with an outstanding balance of $370,000, were converted into 3,217,065 shares of Series C preferred shares at $0.115 per share in connection with the Series C stock exchange. (See Notes 8 and 9 in the Financial Statements).

 

In October 2019, Mr. Thramann obtained $400,000 of short term financing from an unrelated lender. Mr. Thramann then agreed to make the proceeds of that short term financing available to the Company. In exchange, the Company has assumed responsibility for all payments and charges (including principal, interest and fees) required under such short term financing. Under the agreement, the Company was advanced $200,000 net of $12,000 in closing fees and the remaining $200,000 was put into an escrow account. A $100,000 loan financing fee is also due at maturity. On December 2019, the Company made a principal payment of $57,000. The remaining $243,000 of principal and loan financing fees will be due on January 30, 2020.

 

During 2019, the Company entered into new notes payable with three related parties for $80,000, $200,000 and $50,000, respectively. The $80,000 note was repaid in January 2020. The two other note holders elected to convert their notes into 6% Convertible Notes, maturing on March 31, 2020, that convert into common stock at a 75% discount to the initial public offering price. (See Note 10-Subsequent Events to the Financial Statements)

 

Clip Interactive, LLC

 

Corporate Conversion

 

We currently operate as a Colorado limited liability company under the name Clip Interactive, LLC. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Clip Interactive, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Auddia, Inc. As required by the LLC Agreement, the Corporate Conversion must be approved by the requisite number of outstanding units of Clip Interactive, LLC.

 

In connection with the Corporate Conversion, Clip Interactive, LLC unitholders will receive shares of common stock for all units held immediately prior to the Corporate Conversion. The existing units held by our executive officers, directors and 5% Security Holders will be converted on the same basis as all other holders of such units.

 

 

 

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Indemnification agreements

 

We will enter into agreements to indemnify our directors and executive officers. These agreements will, among other things, require us to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such persons in any action or proceeding, including any action by or in our right, on account of any services undertaken by any such person on behalf of our company or that person’s status as a member of our board of directors to the maximum extent allowed under Delaware law.

 

Policy for approval of related-person transactions

 

Prior to this IPO, we have not had a formal policy regarding approval of transactions with related persons. In connection with this IPO, our board of managers has adopted a related-person transaction policy that sets forth our procedures for the identification, review, consideration and approval or ratification for the review of any transaction, arrangement or relationship in which we are a participant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or 5% stockholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.

 

If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related-person transaction,” the related person must report the proposed related-person transaction to our outside general counsel. The policy calls for the proposed related-person transaction to be reviewed by and if deemed appropriate approved by, the audit committee of our board of directors. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the audit committee will review and, in its discretion, may ratify the related-person transaction. The policy also permits the chair of the audit committee to review, and if deemed appropriate approve, proposed related-person transactions that arise between audit committee meetings, subject to ratification by the audit committee at its next meeting. Any related-person transactions that are ongoing in nature will be reviewed annually.

 

A related-person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the audit committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the committee will review and consider:

 

  · the related person’s interest in the related-person transaction;
     
  · the approximate dollar amount involved in the related-person transaction;
     
  · the approximate dollar amount of the related person’s interest in the transaction without regard to the amount of any profit or loss;
     
  · whether the transaction was undertaken in the ordinary course of our business;
     
  · whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party;
     
  · the purpose of, and the potential benefits to us of, the related-person transaction; and
     
  · any other information regarding the related-person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.

 

The audit committee may approve or ratify the transaction only if the audit committee determines that, under all of the circumstances, the transaction is not inconsistent with our best interests. The audit committee may impose any conditions on the related-person transaction that it deems appropriate.

 

The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee of our board of directors in the manner specified in its charter.

 

 

 

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth information regarding the beneficial ownership of our common stock as of September 30, 2019 by (i) each person whom we know to beneficially own more than 5% of our outstanding common stock (a “5% stockholder”), (ii) each director, (iii) each executive officer and (iv) all directors and executive officers as a group. Unless otherwise indicated, the address of each executive officer and director is c/o Auddia, 5755 Central Ave., Suite C, Boulder, CO 80301.

 

The number of shares of common stock “beneficially owned” by each stockholder is determined under rules issued by the SEC regarding the beneficial ownership of securities. This information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership of shares of our common stock includes (1) any shares as to which the person or entity has sole or shared voting power or investment power and (2) any shares as to which the person or entity has the right to acquire beneficial ownership within 60 days after September 30, 2019. Each holder’s percentage ownership before this IPO is based on 6,012,814 shares of common stock outstanding as of September 30, 2019, after giving effect to the Corporate Conversion. Each holder’s percentage ownership after this IPO is based on 10,000,000 shares of fully diluted common stock to be outstanding immediately after the consummation of this IPO, which includes outstanding warrants of 1,384,533 and 602,633 shares reserved for issuance upon the exercise of stock options. The percentages assume no exercise by the underwriters of their option to purchase additional shares.

 

Unless otherwise indicated below, and subject to community property laws where applicable, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock.

 

Name of Beneficial Owner   Number of Shares
Beneficially
Owned
    Percentage of
Shares Beneficially
Owned Before IPO
    Percentage of
Shares Beneficially
Owned After IPO
 
5% Stockholders:                        
Jeffrey Thramann (1)     1,476,742       24.6%       22.8%   (4) 
                         
Executive Officers and Directors:                        
Michael Lawless (2)     257,796       4.3%       3.1%  
Peter Shoebridge (3)     76,899       1.3%       >1%  
Richard Liebman           %       %  
Stephen Deitsch           %       %  
James Booth           %       %  
              %       %  
All directors and executive officers as a group (6 persons)     1,811,437       30.2%        25.9%   

 

(1) Includes 236,598 shares that may be received upon the exercise of warrants
(2) Includes 225,162 of shares that may be received upon the exercise of options
(3) Includes 76,899 of shares that may be received upon the exercise of options
(4) Includes 800,000 shares obtained from the conversion of Bank Debt

 

 

 

 

 

 

 

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DESCRIPTION OF CAPITAL STOCK

 

The following description is intended as a summary of our certificate of incorporation (which we refer to as our “charter”) and our bylaws, each of which will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part and which will be filed as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of the Delaware General Corporation Law. The description of our common stock and preferred stock reflects the completion of the Corporate Conversion. Because the following is only a summary, it does not contain all of the information that may be important to you. For a complete description, you should refer to our charter and bylaws.

 

General

 

Our charter authorizes 300,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 per value per share.

 

As of September 30, 2019, after giving effect to the Corporate Conversion, there were 6,812,814 shares of our common stock outstanding (including 6,812,814 shares of restricted common stock) and approximately 109 stockholders of record. No shares of our preferred stock are designated, issued or outstanding.

 

Common stock

 

Voting rights

 

Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our stockholders do not have cumulative voting rights in the election of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the directors.

 

Dividends

 

Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.

 

We have not declared or paid any cash dividends on our capital stock since our inception. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

 

Liquidation

 

In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock.

 

Rights and preferences

 

Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of our preferred stock that we may designate in the future.

 

 

 

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Fully paid and nonassessable

 

All of our outstanding shares of common stock are, and the shares of common stock to be issued in this IPO will be, fully paid and nonassessable.

 

Preferred stock

 

Our board of directors will have the authority, without further action by our stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of common stock. The issuance of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon our liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of our company or other corporate action. Immediately after consummation of this IPO, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.

 

Piggyback registration rights

 

If we register any of our equity securities either for our own account or for the account of other security holders, the Investors are entitled to piggyback registration rights and may include their shares in the registration. The underwriters may advise us to limit the number of shares included in any underwritten offering to the number of shares which we and the underwriters determine in our sole discretion will not jeopardize the success of the IPO. If this occurs, the aggregate number of securities held by the Investors that may be included in the underwriting shall be allocated among all requesting Investors in proportion to the amount of securities sought to be sold by each Investor.

 

Fees; Indemnification

 

Under the Registration Rights Agreement, we will be responsible, subject to certain exceptions, for the expenses of any registration of securities pursuant to the agreement, other than underwriting discounts and commissions.

 

The Registration Rights Agreement contains customary cross-indemnification provisions, under which we are obligated to indemnify the Investors in the event of material misstatements or omissions in the registration statement or any violation of the Securities Act, Exchange Act, state securities law or any rule or regulation promulgated thereunder attributable to us, and they are obligated to indemnify us, severally and not jointly, for material misstatements, omissions or any violation of the Securities Act, Exchange Act, state securities law or any rule or regulation promulgated thereunder attributable to them.

 

Termination of registration rights

 

The demand registration rights and the piggyback registration rights granted under the Registration Rights Agreement will terminate, with respect to each Investor, as of the date when all registrable securities held by and issued to such Investor may be sold under Rule 144 under the Securities Act, provided such Investor owns less than 1% of the outstanding common stock of the Company. If the offer and sale of these shares of our common stock are registered, the shares will be freely tradable without restriction under the Securities Act, subject to the Rule 144 limitations applicable to affiliates, and a large number of shares may be sold into the public market.

 

Anti-takeover effects of provisions of our charter, our bylaws and Delaware law

 

Some provisions of Delaware law, our charter and our bylaws, contain provisions that could have the effect of delaying, deterring or preventing another party from acquiring or seeking to acquire control of us through the use of the following: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors. These provisions may delay, deter or prevent a change in control or other takeover of our company that our stockholders might consider to be in their best interests, including transactions that might result in a premium being paid over the market price of our common stock and also may limit the price that investors are willing to pay in the future for our common stock. These provisions may also have the effect of preventing changes in our management.

 

 

 

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These provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage anyone seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

 

Charter and bylaws provisions

 

Our charter and our bylaws, include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our company, including the following:

 

  · Board of Directors Vacancies: Our charter and bylaws authorize only our board of directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our board of directors may only be set by a resolution adopted by a majority vote of our entire board of directors. These provisions would prevent a stockholder from increasing the size of our board of directors and then gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes continuity of management.
     
  · Stockholder Action; Special Meetings of Stockholders: Our charter provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a holder controlling a majority of our capital stock would not be able to amend our bylaws or remove directors without holding a meeting of our stockholders called in accordance with our bylaws. Further, our bylaws and charter will provide that special meetings of our stockholders may be called only by a majority of our board of directors, the Chairman of our board of directors or our Chief Executive Officer, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors.
     
  · Advance Notice Requirements for Stockholder Proposals and Director Nominations: Our bylaws provide advance notice procedures for stockholders seeking to bring matters before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our bylaws also specify certain requirements regarding the form and content of a stockholder’s notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company.
     
  · Supermajority Voting: The Delaware General Corporation Law (the “DGCL”), provides, generally, that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our bylaws may be amended or repealed by a majority vote of our board of directors or the affirmative vote of the holders of at least two-thirds of the votes that all our stockholders would be entitled to cast in an annual election of directors. In addition, the affirmative vote of the holders of at least two-thirds of the votes that all our stockholders would be entitled to cast in an election of directors is required to amend or repeal or to adopt certain provisions of our charter.
     
  · No Cumulative Voting: The DGCL provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation’s certificate of incorporation provides otherwise. Our charter does not provide for cumulative voting.
     
  · Removal of Directors Only for Cause: Our charter provides that stockholders may remove directors only for cause and only by the affirmative vote of the holders of at least two-thirds of our outstanding common stock.
     
  · Exclusive Forum Provision in Certificate of Incorporation. Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings: any derivative action or proceeding brought on behalf of the Company, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Company’s stockholders, any action asserting a claim against the Company arising pursuant to any provision of the DGCL or the Company’s certificate of incorporation or bylaws, or any action asserting a claim against the Company governed by the internal affairs doctrine. Despite the fact that the certificate of incorporation provides for this exclusive forum provision to be applicable to the fullest extent permitted by applicable law, Section 27 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder and Section 22 of the Securities Act of 1933, as amended (the “Securities Act”), creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, this provision of the Company’s certificate of incorporation would not apply to claims brought to enforce a duty or liability created by the Securities Act, Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction.

 

 

 

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Delaware law

 

We are subject to the provisions of Section 203 of the DGCL, regulating corporate takeovers. In general, DGCL Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the person became an interested stockholder unless:

 

  · prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
     
  · upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, but not the outstanding voting stock owned by the interested stockholder, (i) shares owned by persons who are directors and also officers and (ii) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
     
  · at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

 

Generally, a business combination includes a merger, asset or stock sale, or other transaction or series of transactions together resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that DGCL Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

 

Limitations on liability, indemnification of officers and directors and insurance

 

Our charter and bylaws contain provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law.

 

Listing

 

We have applied to list our common stock on the Nasdaq Capital Market, under the symbol “AUDD.”

 

Transfer agent and registrar

 

The transfer agent and registrar for the shares of our common stock will be V- Stock Transfer Company

 

 

 

 

 

 

 

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this IPO, there has been no public market for our common stock and a liquid trading market for our common stock may not develop or be sustained after this IPO. Future sales of our common stock in the public market after this IPO, or the perception that those sales may occur, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future. As described below, only a limited number of shares of our common stock will be available for sale in the public market for a period of several months after consummation of this IPO due to contractual and legal restrictions on resale described below. Future sales of our common stock in the public market either before (to the extent permitted) or after restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our common stock at such time and our ability to raise equity capital at a time and price we deem appropriate. Although we have applied to list our common stock on the Nasdaq Capital Market under the symbol “AUDD,” we cannot assure you that there will be an active public market for our common stock.

 

Sale of restricted shares

 

Based on the number of shares of our common stock outstanding as of September 30, 2019 after giving effect to the Corporate Conversion, upon the closing of the IPO, and assuming no exercise of the underwriters’ option to purchase additional shares of common stock, we will have outstanding 8,012,814 shares of common stock. This includes the 1,200,000 shares that we are selling in the IPO, the 1,800,000 shares that are being offered for sale by the Selling Shareholders pursuant to a Selling Shareholder Prospectus dated as of the date of this Prospectus, which shares may be resold in the public market immediately without restriction, unless purchased by our affiliates and 800,000 shares to be issued to a related party for the conversion of $4,000,000 in Company debt, but does not include 602,633 common shares reserved for issuance upon the exercise of common share purchase options and 1,384,553 common shares reserved for issuance upon the exercise of common share purchase warrants. Following this offering, 4,212,814 shares will be restricted as a result of securities laws or lock-up agreements but may be able to be sold commencing 180 days after the IPO as described in the “Shares eligible for future sale” and “Underwriting” sections of this prospectus.

 

All of the 1,200,000 shares of common stock to be sold in the IPO, and 1,800,000 shares of common stock being registered for sale pursuant to the Selling Shareholder Prospectus, and any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by any of our “affiliates” as such term is defined in Rule 144 of the Securities Act. All remaining shares of common stock held by existing stockholders immediately prior to the consummation of this IPO will be “restricted securities” as such term is defined in Rule 144. These restricted securities were issued and sold by us in private transactions and are eligible for public sale only if registered under the Securities Act or if they qualified for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144 or Rule 701, which rules are summarized below. As a result of the contractual 180-day lock-up period described below and the provisions of Rule 144 and 701 of the Securities Act, the restricted securities will be available for sale in the public markets as follows:

 

Date Available for Sale  Shares Eligible for
Sale
  Description
Date of Prospectus  3,000,000  Shares sold in the IPO and shares saleable under Rule 144 that are not subject to a 180-day lock-up period.
       
90 Days after Date of Prospectus  0   Shares saleable under Rules 144 and 701 that are not subject to a 180-day lock-up period.
       
180 Days after Date of Prospectus  4,212,814   Lock-up shares released and saleable under Rules 144 and 701

 

 

 

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Rule 144

 

In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act, for at least 90 days, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our “affiliates” for purposes of Rule 144 at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months, including the holding period of any prior owner other than one of our “affiliates,” is entitled to sell those shares in the public market (subject to the lock-up agreement referred to below, if applicable) without complying with the manner of sale, volume limitations or notice provisions of Rule 144, but subject to compliance with the public information requirements of Rule 144. Rule 144(a)(1) defines an “affiliate” of an issuing company as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Directors, officers and holders of ten percent or more of the Company’s voting securities (including securities which are issuable within the next sixty days) are deemed to be affiliates of the issuing company. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than “affiliates,” then such person is entitled to sell such shares in the public market without complying with any of the requirements of Rule 144 (subject to the lock-up agreement referred to below, if applicable). In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, our “affiliates,” as defined in Rule 144, who have beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than one of our “affiliates,” are entitled to sell in the public market, upon expiration of any applicable lock-up agreements and within any three-month period, a number of those shares of our common stock that does not exceed the greater of:

 

  ·   1% of the number of common shares then outstanding, which will equal approximately 100,000 shares of common stock immediately after this IPO (calculated assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options or warrants); or

 

  ·   the average weekly trading volume of our common stock on the Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Such sales under Rule 144 by our “affiliates” or persons selling shares on behalf of our “affiliates” are also subject to certain manner of sale provisions, notice requirements and to the availability of current public information about us. Notwithstanding the availability of Rule 144, the holders of substantially all of our restricted securities have entered into lock-up agreements as referenced above and their restricted securities will become eligible for sale (subject to the above limitations under Rule 144) upon the expiration of the restrictions set forth in those agreements.

 

Rule 701

 

The Rule 701 exemption is not available to Exchange Act reporting companies. In general, under Rule 701 as currently in effect, any of our employees, directors, officers, consultants or advisors who acquired common stock from us in connection with a written compensatory stock or option plan or other written agreement in compliance with Rule 701 under the Securities Act before the effective date of the registration statement of which this prospectus is a part (to the extent such common stock is not subject to a lock-up agreement) is entitled to rely on Rule 701 to resell such shares beginning 90 days after we become subject to the public company reporting requirements of the Exchange Act. Our affiliates can resell shares in reliance on Rule 144 without having to comply with the holding period requirement, and non-affiliates of the Company can resell shares in reliance on Rule 144 without having to comply with Rule 144’s current public information and holding period requirements in Rule 144. Accordingly, subject to any applicable lock-up agreements, beginning 90 days after we become subject to the public company reporting requirements of the Exchange Act, under Rule 701 persons who are non-affiliates may resell those shares without complying with the minimum holding period or public information requirements of Rule 144, and affiliates of the Company may resell those shares without compliance with Rule 144’s minimum holding period requirements.

 

Equity incentive plans

 

Our board of directors and stockholders previously adopted the Existing Plan. In connection with this IPO, our board of directors and stockholders intend to adopt the 2019 Plan. For a description of our Existing Plan and 2018 Plan, see “Compensation of our executive officers and directors—Equity incentive plans.”

 

 

 

 61 

 

 

Lock-up agreements

 

In connection with this IPO, we, our officers and directors, and certain of our existing security holders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Network 1 Financial Securities, Inc. dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock, subject to certain exceptions, Network 1 Financial Securities, Inc. in their sole discretion may release any of the securities subject to these lock-up agreements at any time. If the restrictions under the lock-up agreements are waived, shares of our common stock may become available for resale into the market, subject to applicable law, which could reduce the market price for our common stock. See “Underwriting.”

 

Registration Statements

 

As explained in the Explanatory Note to the registration statement of which this prospectus forms a part, the registration statement of which this prospectus forms a part, also contains the Selling Stockholder Prospectus to be used in connection with the potential resale by certain selling stockholders of up to an aggregate of 1,800,000 shares of our common stock owned by current shareholders concurrently with the registration of this initial public offering. These shares of common stock are being registered to permit public resale of the shares, and the selling stockholders may offer the shares for resale from time to time pursuant to the Selling Stockholder Prospectus. The selling stockholders may also sell, transfer or otherwise dispose of all or a portion of their shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective registration statement covering those shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 62 

 

 

UNDERWRITING

 

Prior to this IPO, there has been no public market for our common stock. We have applied for approval of our common stock for listing on The Nasdaq Capital Market under the symbol “AUDD.” Trading of our common stock on Nasdaq is expected to begin following this prospectus being declared effective by the SEC.

 

Underwriting

 

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Network 1 Financial Securities, Inc. is acting as the representative, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:

 

Name   

Number of Shares

 
Network 1 Financial Securities, Inc.     
Total:   1,200,000 

 

The underwriters and the representative are collectively referred to as the “underwriters” and the “representative,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

 

The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the IPO price and other selling terms may from time to time be varied by the representative.

 

Over-Allotment Option

 

We have granted to the underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to 180,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the IPO of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.

 

Pricing of the IPO

 

Prior to this IPO, there has been no public market for our common stock. In determining the initial public offering price, we and the underwriters have considered a number of factors including:

 

  the information set forth in this prospectus and otherwise available to the underwriters;
     
  our prospects and the history and prospects for the industry in which we compete;
     
  an assessment of our management;
     
  our prospects for future earnings;
     
  the general condition of the securities markets at the time of this IPO;
     
  the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and
     
  other factors deemed relevant by the underwriters and us.

 

 

 

 63 

 

 

Neither we nor the underwriters can assure investors that an active trading market will develop for shares of our common stock, or that the shares will trade in the public market at or above the initial public offering price.

 

The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

 

Discount, Commissions and Expenses

 

The following table shows the public IPO price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

 

Public offering price  $    $     $   
Underwriting discounts and commissions to be paid by us (1)  $    $    $   
Proceeds, before expenses, to us  $    $    $   

 

(1)       Consists of an underwriting commission of 8.0%. Does not include an advisory fee of 2.0% equal to the gross proceeds raised in the primary IPO.

 

We will pay all fees, disbursements and expenses in connection with this proposed IPO, including, without limitation: the Company’s legal and accounting fees and disbursements; the costs of preparing, printing, mailing and delivering the registration statement, the preliminary and final prospectus contained therein and amendments thereto, post-effective amendments and supplements thereto, the underwriting agreement and related documents (all in such quantities as the representative may reasonably require); the fees and expenses of the transfer agent and registrar, clearing fees and DTC fees, preparing and printing stock certificates; the costs of any “due diligence” meetings; all reasonable and documented fees and expenses for conducting a net road show presentation; all filing fees (including SEC filing fees) and communication expenses relating to the registration of the shares to be sold in this IPO, FINRA filing fees; transfer taxes, if any, payable upon the transfer of securities from the Company to the representative; and the fees and expenses of the transfer agent, clearing firm and registrar for the shares of common stock. In addition, we will be obligated to reimburse the representative for its out-of-pocket expenses up to a maximum of $10,000, which has been previously paid by us to the representative for out-of-pocket accountable expenses. The underwriting agreement, however, provides that in the event the IPO is terminated, any advance expense deposits paid to the underwriters will be returned to the extent that IPO expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).

 

We estimate that the total expenses of the IPO payable by us, excluding underwriting discounts and commissions, will be approximately $_______.

 

Option to Purchase Additional Shares

 

We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to 180,000 additional shares at the public offering price, less the underwriting discount. If the underwriters exercise all or part of this option, the underwriters will be obligated, subject to conditions contained in the underwriting agreement, to purchase additional shares covered by the option at the public offering price, less the underwriting discount.

 

 

 

 64 

 

 

Underwriters Warrants

 

We have agreed to issue to the underwriters warrants to purchase up to a total of 96,000 shares of common stock (8% of the shares of common stock sold by the Company in this IPO without including shares issuable upon exercise the over-allotment option). The warrants are exercisable at $                  per share (125% of the public offering price) commencing on a date which is 180 days from the effective date of the IPO under this prospectus and expiring on a date which is no more than five (5) years from the effective date of the IPO in compliance with FINRA Rule 5110(f)(2)(G). The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriters (or their permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from effectiveness. In addition, the warrants provide for registration rights upon request, in certain cases. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.

 

Discretionary Accounts

 

The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.

 

Lock-Up Agreements

 

Pursuant to certain “lock-up” agreements, we, our executive officers and directors, and certain stockholders have agreed, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently acquired, without the prior written consent of the representative, for a period of 180 days from the date of effectiveness of the IPO.

 

All directors and officers and certain holders of our outstanding common stock and securities convertible into or exercisable or exchangeable for common stock are subject to lock- up agreements with the underwriters agreeing that, without the prior written consent of the representative, they will not, during the period ending 180 days after the date of this prospectus (the “restricted period”):

 

  offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, or announce the intention to otherwise dispose of, any shares of common stock or securities convertible into or exercisable or exchangeable for common stock whether now owned or hereafter acquired;
     
  enter into any swap, hedge or similar agreement or arrangement that transfers in whole or in part, the economic risk of ownership of shares of common stock beneficially owned or securities convertible into or exercisable or exchangeable for common stock, whether now owned or hereafter acquired; or
     
  engage in any short selling of common stock,

 

 

 

 65 

 

 

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, each such person agrees that, without the prior written consent of the representative on behalf of the underwriters, such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.

 

The restrictions in the immediately preceding paragraph do not apply to our directors or officers in certain circumstances, including the (i) transfers of our common stock acquired in open market transactions after the completion of this IPO; (ii) transfers of our common stock as bona fide gifts, by will, to an immediate family member or to certain trusts provided that no filing under Section 16(a) of the Exchange Act would be required or voluntarily made; (iii) distributions of our common stock to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate, or to an entity controlled or managed by an affiliate provided that no filing under Section 16(a) of the Exchange Act would be required or voluntarily made; (iv) distributions of our common stock to the stockholders, partners or members of such holders provided that no filing under Section 16(a) of the Exchange Act would be required or voluntarily made; (v) the exercise of options, settlement of restricted stock units or other equity awards granted under a stock incentive plan or other equity award plan described in this prospectus, or the exercise of warrants outstanding described in this prospectus; (vi) transfers of our common stock to us for the net exercise of options, settlement of restricted stock units or warrants granted pursuant to our equity incentive plans or to cover tax withholding for grants pursuant to our equity incentive plans; (vii) the establishment by such holders of trading plans under Rule 10b5-1 under the Exchange Act provided that such plan does not provide for the transfer of common stock during the restricted period; (viii) transfers of our common stock pursuant to a domestic order, divorce settlement or other court order; (ix) transfers of our common stock to us pursuant to any right to repurchase or any right of first refusal we may have over such shares; (x) conversion of our outstanding securities into common stock in connection with the closing of this IPO; and (xi) transfers of our common stock pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by our board of directors.

 

Certain of these exceptions are subject to a requirement that the transferee enter into a lock-up agreement with the underwriters containing similar restrictions.

 

We also agreed pursuant to that lock-up agreement that, without the prior written consent of the representative, we will not, during the restricted period (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock (other than the shares sold in the primary IPO and common stock issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing prior to the primary IPO or pursuant to currently outstanding options, warrants or rights) provided that either (a) such shares shall not vest during the restricted period or (b) the grantee of such shares will execute a lock-up agreement; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock other than a registration statement on Form S-4 or S-8; or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital stock, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of our capital stock or such other securities, in cash or otherwise.

 

The restrictions contained in the preceding paragraph do not apply to (i) the securities to be sold in connection with the primary IPO, (ii) the issuance by of shares of common stock upon the exercise of a stock option or warrant or the conversion of a security outstanding prior to the primary IPO, (iii) the issuance by of any security under any equity compensation plan, (iv) the issuance of shares of common stock in the connection with mergers, acquisitions or joint ventures, (v) the issuance of shares of common stock to consultants in our ordinary course of business and not for capital raising transactions and (vi) the issuance of shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock at a price per share greater than $7.50 per share.

 

The representative may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time.

 

 

 

 66 

 

 

In order to facilitate the IPO of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this IPO. As an additional means of facilitating this IPO, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.

 

We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

 

Electronic Offer, Sale and Distribution of Shares

 

A prospectus in electronic format may be made available on the websites maintained by the underwriters, if any, participating in this IPO and the underwriters participating in this IPO may distribute prospectuses electronically. The underwriters may agree to allocate a number of shares for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriter that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or the underwriter in its capacity as underwriters, and should not be relied upon by investors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 67 

 

 

LEGAL MATTERS

 

Bingham & Associates Law Group, APC of Encinitas, CA will pass upon the validity of the shares of common stock offered hereby for us. The underwriters are represented by Gordon Rees Scully & Mansukhani LLP.

 

EXPERTS

 

The financial statements as of December 31, 2017 and 2018 included in this prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company’s ability to continue as a going concern as described in Note 1 to the financial statements) of Plante & Moran PLLC, 8181 East Tufts Avenue, Denver, CO 80237, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock being offered by this prospectus. This prospectus, which constitutes part of that registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. Some items included in the registration statement are omitted from the prospectus in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock offered in this prospectus, we refer you to the registration statement and the accompanying exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.

 

A copy of the registration statement and the accompanying exhibits and any other document we file may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549 and copies of all or any part of the registration statement may be obtained from that office upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the public reference facilities in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are available to the public from the SEC’s website at www.sec.gov.

 

Upon the completion of this IPO, we will be subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, we will file proxy statements, periodic information and other information with the SEC. All documents filed with the SEC are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.auddia.com. You may access our reports, proxy statements and other information free of charge at this website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 68 

 

 

INDEX TO FINANCIAL STATEMENTS

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Financial Statements for the nine months ended September 30, 2019 (Unaudited)     
Condensed Balance Sheets as of September 30, 2019 and 2018 (Unaudited)   F-2 
Condensed Statements of Operations for the nine months ended September 30, 2019 and 2018 (Unaudited)   F-3 
Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (Unaudited)   F-4 
Condensed Statement of Changes in Members’ Deficit for the nine months ended September 30, 2019 and 2018 (Unaudited)   F-6 
Notes to Condensed Financial Statements for the nine months ended September 30, 2019 (Unaudited)   F-8 
      
      
Financial Statements for the year ended December 31, 2018     
Report of Independent Registered Public Accounting Firm   F-22 
Balance Sheets   F-23 
Statements of Operations   F-24 
Statement of Changes in Members' Deficit   F-25 
Statements of Cash Flows   F-28 
Notes to Financial Statements   F-29 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 F-1 

 

  

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Condensed Balance Sheets

 

   September 30, 
   2018   2019 
   (unaudited)   (unaudited) 
Assets        
Current assets          
Cash  $446,186   $85,083 
Accounts receivable, net   86,913    21,855 
Total current assets   533,099    106,938 
           
Non-current assets          
Capitalized software, net   1,185,531    1,601,818 
Security deposits   20,614    7,594 
Other   10,977    1,457 
Total non-current assets   1,217,122    1,610,869 
Total assets   1,750,221    1,717,807 
           
Liabilities and Members' Deficit          
Current liabilities          
Accounts payable and accrued liabilities   666,896    989,375 
Line-of-credit   6,000,000    6,000,000 
Subscription escrow payable   500,000     
Convertible notes payable       462,500 
Notes payable to related parties   725,000    1,055,000 
Accrued fees to a related party   17,605    806,161 
Total current liabilities   7,909,501    9,313,036 
           
Commitments and contingencies          
           
Members' deficit          
Series C preferred shares (liquidation preference of $39,787,038)       28,110,576 
Series B preferred shares (liquidation preference of $4,184,730)   21,393,477    2,709,775 
Series A preferred shares (liquidation preference of $1,925,000)   8,244,314    1,894,314 
Common shares   71,967    2,338,398 
Additional paid-in capital   1,373,833    4,751,541 
Accumulated deficit   (37,242,871)   (47,215,177)
Subscription receivable       (184,656)
Total members' deficit   (6,159,280)   (7,595,229)
Total liabilities and members' deficit  $1,750,221   $1,717,807 

 

 

 

See notes to financial statements.

 

 

 F-2 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Condensed Statements of Operations

 

 

   Nine Months Ended September 30, 
   2018   2019 
   (unaudited)   (unaudited) 
Revenue  $1,225,086   $382,233 
Operating expenses:          
Direct Costs of Service   1,378,512    747,510 
Research and development   240,284    175,757 
General and administrative   1,200,093    1,527,966 
Sales & Marketing   168,294    111,947 
           
Total operating expense   2,987,183    2,563,180 
           
Loss from operations   (1,762,097)   (2,180,947)
Other income (expense)          
Interest expense   (799,814)   (952,966)
Interest income   40    96 
Total other expense   (799,774)   (952,870)
           
Net loss  $(2,561,871)  $(3,133,817)

 

 

 

   Nine Months Ended September 30, 
   2019   2018 
         
Pro Forma weighted average common shares outstanding (Note 9)          
Basic - Class A Common Shares   95,384,986    4,388,024 
Basic - Series F Preferred Shares   83,076,484    117,722,097 
Diluted - Class A Common Shares   95,384,986    4,388,024 
Diluted - Series F Preferred Shares   83,076,484    117,722,097 
           
Pro Forma earnings (loss) per share attributable to common shares (Note 9)          
Basic - Class A Common Shares  $(0.03)  $(0.03)
Basic - Series F Preferred Shares  $(0.03)  $(0.03)
Diluted - Class A Common Shares  $(0.03)  $(0.03)
Diluted - Series F Preferred Shares  $(0.03)  $(0.03)

 

 

 

See notes to financial statements.

 

 

 F-3 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Condensed Statements of Cash Flows

 

 

   For the Nine Months Ended 
   September 30, 
   2018   2019 
   (unaudited)   (unaudited) 
Cash flows from operating activities:          
Net loss  $(2,561,871)  $(3,133,817)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   209,967    301,486 
Bad debt provision       (7,500)
Share-based compensation   285,405    139,673 
Issuance of common stock for consulting services        138,921 
Interest expense on warrants issued        
Accrued interest converted into Series B preferred stock        
Series B issued for deferred wages        
Issuance of common stock for severance        
Changes in assets and liabilities          
Accounts receivable   173,409    73,045 
Accrued fees to a related party        
Other assets       11,564 
Accounts payable and accrued liabilities   783,623    1,070,386 
Net cash used in operating activities   (1,109,467)   (1,406,242)
           
Cash flows from investing activities          
Software capitalization   (607,010)   (578,070)
Purchase of property and equipment        
Net cash used in investing activities   (607,010)   (578,070)
           
Cash flows from financing activities          
Proceeds from issuance of preferred shares   2,076,610    108,779 
Proceeds from conversion of notes payable        
Proceeds from issuance of common shares       731,392 
Proceeds from related-party debt       330,000 
Proceeds from convertible debt   370,000    462,500 
Payments of related-party debt   (330,000)    
Subscription receivable       165,025 
Equity issuance costs on Series B preferred shares        
Net cash provided by financing activities   2,116,610    1,797,696 
           
Net increase (decrease) in cash   400,133    (186,616)
           
Cash - beginning of year   46,053    271,699 
Cash - end of period  $446,186   $85,083 

 

 

 

 F-4 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Condensed Statements of Cash Flows (continued)

 

 

Supplemental disclosure of cash flow information:        
Cash paid for interest  $581,168   $323,250 
           
Supplemental disclosure of non-cash activity:          
Accumulation of dividends for Series C preferred shares       1,194,203 
Accumulation of dividends for Series B preferred shares   1,170,273    193,196 
Conversion of accrued collateral fees to a note payable       725,000 
Series B preferred shares issued for conversion of debt and accrued interest  $   $ 
Series B preferred shares issued to Clip Digital shareholders  $   $ 
Accumulation of dividends on Series B and Series C preferred stock  $   $ 
Series B preferred shares issued for a note receivable  $   $ 
Series B preferred shares issued for conversion of debt  $370,000   $ 
Series B preferred shares issued for foregone compensation  $137,515   $ 
Deemed dividend charged to accumulated deficit for conversion  $   $ 
Common shares issued for conversion of accrued interest  $   $ 
Common shares issued for notes receivable  $   $ 
Common shares issued for severance  $11,250   $ 
Warrants issued to non-participating Series A and Series B shareholders  $   $ 
Series B warrants issued in connection with debt  $   $ 
Warrants issued in connection with a security interest  $   $ 

 

 

See notes to financial statements.

 

 

 F-5 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Condensed Statement of Changes in Members’ Deficit

 

 

   Series C Preferred Shares   Series B Preferred Shares   Series A Preferred Shares   Series F Preferred Shares 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount 
Balance - December 31, 2017      $    14,774,990   $17,639,079    8,275,000   $8,244,314    117,722,097   $ 
Series B preferred shares issued less issuance costs of $23,130           1,973,569    2,076,610                 
Series B preferred shares issued for foregone compensation           143,497    137,515                 
Series B preferred shares issued for conversion of debt             342,861    370,000                      
Common shares issued for severance                                
Accumulating dividends on Series B preferred shares               1,170,273                 
Share-based compensation expense                                
Net loss                                
Balance - September 30, 2018      $   17,234,917   $21,393,477    8,275,000   $8,244,314    117,722,097   $ 

 

 

   Common   Additional paid in   Accumulated   Subscriptions     
   Shares   Amount   Capital   Deficit   Receivable   Total 
Balance - December 31, 2017   3,934,876   $60,717   $1,237,193   $(33,510,727)  $   $(6,329,424
Series B preferred shares issued less issuance costs of $23,130                       2,076,610 
Series B preferred shares issued for foregone compensation                       137,515 
Series B preferred shares issued for conversion of debt                            370,000 
Common shares issued for severance   680,475    11,250                11,250 
Accumulating dividends on Series B preferred shares               (1,170,273)        
Share-based compensation expense           136,640            136,640 
Net loss               (2,561,871       (2,561,871)
Balance - September 30, 2018   4,615,351   $71,967   $1,373,833   $(37,242,871  $   $(6,159,280)

 

 

See notes to financial statements.

 

 F-6 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statement of Changes in Members’ Deficit (continued)

 

   Series C Preferred Shares   Series B Preferred Shares   Series A Preferred Shares   Series F Preferred Shares 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount 
Balance - December 31, 2018   186,271,597   $24,798,964    2,316,377   $2,836,688    2,975,000   $2,944,314    117,722,097   $ 
Common shares subscription receivable                                
Series B preferred shares issued net of $23,792 in issuance cost           127,045    108,779                 
Series B preferred shares subscription receivable                                
Conversion of Series A and Series B preferred shares for Series C preferred shares   12,008,056    1,929,521    (273,497)   (241,000)   (1,050,000)   (1,050,000)   (8,596,031)    
Common shares issued for cash                           (31,666,865)    
Share-based compensation expense                                
Common shares issued for consulting services                           ––      
Accumulated dividends converted to Series C from Series B shares       187,888        (187,888)                
Accumulation of dividends on Series C preferred shares       1,194,203                         
Accumulation of dividends on Series B preferred shares               193,196                 
Net loss                                
Balance - September 30, 2019   198,279,653   $28,110,576   2,169,925   $2,709,775    1,925,000   $1,894,314    77,459,201   $ 

 

 

   Common   Additional paid in   Accumulated   Subscriptions     
   Shares   Amount   Capital   Deficit   Receivable   Total 
Balance - December 31, 2018   65,316,214   $1,468,085   $4,611,868   $(42,055,440)  $(349,681  $(5,745,202
Common shares subscription receivable                   103,450    103,450 
Series B preferred shares issued net of $23,792 in issuance cost                       108,779 
Series B preferred shares subscription receivable                   61,575    61,575 
Conversion of Series A and Series B preferred shares for Series C preferred shares               (638,521)        
Common shares issued for cash   31,799,648    731,392                731,392 
Share-based compensation expense           139,673            139,673 
Common shares issued for consulting services   6,040,035    138,921                138,921 
Accumulated dividends converted to Series C from Series B shares                        
Accumulation of dividends on Series C preferred shares               (1,194,203)        
Accumulation of dividends on Series B preferred shares               (193,196)        
Net loss               (3,133,817)       (3,133,817)
Balance - September 30, 2019   103,155,807   $2,338,398   $4,751,541   $(47,215,177)  $(184,656  $(7,595,229)

 

 

 

See notes to financial statements.

 

 

 F-7 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

Note 1 - Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Clip Interactive, LLC, (DBA Auddia), (the “Company”, “Auddia”, “we”, “our”) is a technology company that makes radio broadcasts and streaming audio content digitally actionable and measurable. On January 14, 2012, Clip Interactive, LLC was formed as a Colorado limited liability company and on November 25, 2019 changed its trade name to Auddia.

 

During 2018, the Company approved a 9.07:1.00 stock adjustment for common shares and Series F preferred shares which has been treated in substance as a stock split with all share and per-share amounts for Series F preferred shares, Series 1 Common Shares and options being retroactively adjusted.

 

Basis of Presentation and Preparation

 

The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. Such unaudited condensed financial statements and accompanying notes are the representations of the Company’s management, who is responsible for their integrity and objectivity. Interim results for the nine months ended September 30, 2019 are not necessarily indicative of the results the Company will have for the full year ending December 31, 2019.

 

The accompanying condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which are normal and recurring, necessary to fairly state its financial position, results of operations and cash flows. The financial data and the other information disclosed in these notes to the condensed financial statements reflected in the nine-month periods presented are unaudited and should be read in conjunction with the Company’s December 31, 2018 audited financial statements

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to depreciation, valuation of capital stock and warrants and options to purchase shares of the Company's preferred and common shares, and the estimated amortization period for capitalized software development costs. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

 

 

 

 F-8 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

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 continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.

 

Accounts Receivable

 

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. As of September 30, 2019, and 2018, the allowance for doubtful accounts was $2,500 and $15,000, respectively.

 

Credit Risk, Major Customers, and Suppliers

 

Revenues are predominately in the radio industry located primarily in the United States. The Company extends trade credit to its customers on terms that are generally practiced in the industry. One major customer accounted for 64.8% and 23.3% of accounts receivable at September 30, 2019 and 2018, respectively. Two and three customers accounted for approximately 83.2% percent and 72.2% percent of revenues as of and for the period ended September 30, 2019 and 2018, respectively.

 

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.

 

 

 

 F-9 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

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 impaired and expensed during the period of such determination. Software development costs of $578,070 and $607,010 were capitalized for the nine months ended September 30, 2019 and 2018. Amortization of capitalized software development costs were $295,856 and $188,507 for the nine months ended September 30, 2019 and 2018, respectively and are included in depreciation and amortization expense.

 

Long-Lived Assets

 

The Company reviews its 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 not impaired as of September 30, 2019 and, as a result, no impairment has been recognized in the accompanying financial statements.

 

Income Taxes

 

The Company has elected to be treated as a pass-through entity for income tax purposes. Accordingly, taxable income and losses of the Company are reported on the income tax returns of its members, and no provision for federal income taxes has been recorded in the accompanying financial statements. Had the Company been a taxable entity during the years ended December 31, 2018 and 2017, or the period ended September 30, 2019, no provision for income taxes would have been recorded as a result of net operating loss carryforwards generated, which would have been fully reserved by a deferred tax asset valuation allowance.

 

The Company may only recognize tax benefits from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company is required to make many subjective assumptions and judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to its subjective assumptions and judgments.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense for the nine months ended September 30, 2019 and 2018 were not significant.

 

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.

 

 

 

 F-10 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

Pro Forma Loss per Share

 

Basic loss per 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. The Company computes pro forma net loss per share using the two-class method, which is an allocation formula that determines net loss per share for common shares and participating securities, which for the Company is the Series A and Series F preferred shares. The Company has determined that holders of Series A and Series F outstanding preferred shares participate in earnings of the Company on a pro-rata basis with common shareholders. However, the Series A preferred shares are under no contractual obligation to share in the losses of the Company on a pro-rata basis with common shareholders, accordingly the Company has presented loss per share separately for common stock and Series F preferred stock.

 

Geographic Locations & Segments

 

For the nine months ended September 30, 2019 and 2018, 100% of revenue attributable to customers and 100% of our net assets are located within the United States.

 

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.

 

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

 

The new accounting standard under ASC 606 became effective for all non-public companies with fiscal years beginning after December 15, 2018. On January 1, 2019, the Company adopted ASC 606 using the modified retrospective method. The impact of adopting ASC 606 resulted in immaterial impact to members deficit.

 

This method required retrospective application of the new accounting standard to all unfulfilled contracts that were outstanding as of January 1, 2019.

 

Results for reporting periods beginning after January 1, 2019 are presented in accordance with ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company's historic accounting under ASC 605 - Revenue Recognition ("ASC 605").

 

Revenue Recognition

 

Revenues are recognized when a contract with a customer exists, and the control of the promised services are transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those services. Substantially all of our revenues are generated from contracts with customers in the United States.

 

 

 

 F-11 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

Liquidity and Capital Resources

 

In the nine months ended September 30, 2019, the Company generated negative cash flow from operations of ($1,406,202) and incurred a net loss of ($3,133,817). Also, the Company had an accumulated deficit of ($47,215,177) as of September 30, 2019. Historically, the Company has satisfied its capital needs with the net proceeds from its sales of equity securities, the issuance of convertible debt and bank debt. The Company expects to continue to generate net losses for the foreseeable future as it makes significant investments in developing and selling its products and services. Also, the Company will continue to evaluate potential acquisitions of, or investments in, companies or technologies that complement its business, which acquisitions may require the use of cash.

 

The accompanying financial statements are presented assuming that the Company will continue as a going concern. However, during the nine months ended September 30, 2019 we incurred a net loss of $3,133,817 and have no available borrowings on our credit facility to draw upon. The Company is operating with the expectation that it will be able to secure necessary financing until it becomes profitable. Management has been able to secure some additional financing subsequent to September 30, 2019 of $1,342,078 of funds as described in Subsequent Events (Note 10) and the Company will continue to secure additional short term financing to cover expenses for the next 12 months. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result if the Company is unable to continue as a going concern.

 

Note 2-Revenue Recognition

 

The Company’s contracts with customers generally fall within two formats, those that encompass development services, access to the Company’s interactive technology platform through a hosted business model and the ability to execute placement of spot advertising through the Company’s interactive technology platform, or alternatively contracts exclusively for digital advertising placement of spot ads through the Company’s mobile apps and web players. The Company allocates the transaction price to each separate performance obligation as applicable within each contract based upon their relative selling prices.

 

Development Service Fee Revenue

 

Revenue generated from development services is comprised of services for the development, design and customization of software applications for station branded mobile apps and web/desktop players for radio stations. The mobile apps enable our customer’s users to interact with the live broadcast and streaming content while providing attribution to each station, and enabling local and national digital monetization capabilities.

 

The web/desktop player provides a listening platform that enables full interactive radio capabilities for desktop users that prefer web based listening. The Company determined that the development, design, build and deployment, configuration, and customization are a bundle of professional services provided to the customer for the purpose of the Clip Mobile and Web Desktop Apps and are considered a single performance obligation. Revenue is recognized over time as the services are satisfied and any advanced payments received are not recognized as revenue but instead are recorded in a deferred contract liability until the customer’s services are satisfied. Under the Company’s current outstanding contracts such services have been minimal and are not expected to be a significant performance obligation under its existing contracts in the future.

 

Platform Services Fee Revenue

 

Revenue generated from platform services is comprised of the customer’s use of the Company’s interactive technology platform that includes access rights to use the licensed software, software hosting, support and maintenance, data tracking analytics, advertising trafficking and monitoring of the mobile app and web/desktop player applications. The Company determined that the hosting of software, license access, support, training, maintenance and unspecified periodic upgrades or updates, monitoring hardware, interactive content management, access to content library, data and analytics dashboard, programming and Ad campaign training are a bundle of product and services that have the same period and pattern of transfer as the service to access the Company’s Platform and have been treated a single performance obligation. Revenue is recognized over time as the customer simultaneously receives and consumes the benefits provided by the Company’s platform services.

 

 

 

 F-12 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

Advertising Revenue

 

The Company generates advertising revenue in two distinctive forms one which can be from third party advertisers that place ads on the Company’s mobile apps and web players which are separate customer contracts whereby such advertising access is the only service and performance obligation within those contracts, and second is ad placements on the same platform but managed by the Company for its customers in connection with its contracts to provide development services and Platform access services to its customers.

 

The external advertising revenues are comprised of local and national interactive spots that are sourced and managed by customers or by third party service providers (such as Google), whereby the Company receives a portion of the dollars spent by the advertiser. In late 2018, the Company decided to move to only internally managed digital advertising for 2019 and discontinue revenue sharing agreements with our clients for advertising sourced by the client. Revenue is recognized as performance obligations are satisfied, which generally occurs as ads are delivered through the platform. We generally recognize revenue based on delivery information from the external providers campaign trafficking systems.

 

The internal advertising revenues are comprised of advertising fees for local and national interactive spot and local or digital only advertising campaign fees that are managed by the Company. For these advertising spots, the Company retains all the money spent on the advertising campaigns run on the Company’s interactive platform. Revenue is recognized as performance obligations are satisfied, which generally occurs as ads are delivered through the platform.

 

For Interactive and Digital Campaign and Spot Ad Fees which may include customer digital and interactive spot ad campaigns, interactive spot campaigns, the revenue is recognized at a point in time under the “as-invoiced” practical expedient, since customer usage driven variability is not required to be estimated but rather is allocated to the distinct time period in which the variable activity occurs.

 

Certain customers may receive platform fee credits or advertising discounts, which are considered as variable consideration in the determination of the transaction price. Since each of the performance obligations related to the fixed price arrangements is discounted ratably based on their relative standalone selling prices, there appears to be no indication of the need to reallocate the discount.

 

Contract Assets and Liabilities

 

The Company had no contract assets or contract liabilities as of January 1, 2019 or September 30, 2019 as the company does not receive payments in advance and is generally entitled to bill for monthly services as they are provided to under its existing customer contracts.

 

Practical Expedients and Exemptions

 

We generally expense sales commissions when incurred because the duration of the contracts for which we pay commissions are less than one year. These costs are included in the sales and marketing line item of our Condensed 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.

 

We do 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 have the right to invoice for services performed.

 

 

 

 F-13 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

The following table presents revenues disaggregated by revenue source:

 

   Nine months Ended September 30, 
   2019   2018 
Revenues          
         Development Service Fees (app and web design, development)  $15,293   $ 
         Platform Service Fees (hosting services, support, data analytics)   179,303    492,988 
         Digital advertising served by 3rd parties   172,697    421,630 
         Digital advertising served by Clip Interactive   14,943    310,468 
   $382,233   $1,225,086 

 

Note 3 – Balance Sheet Disclosures

 

Accounts payable and accrued liabilities consist of the following:

 

   September 30, 
   2019   2018 
Accounts payable  $826,935   $651,212 
Wages payable   132,151     
Credit cards payable   26,027    15,684 
Accrued interest   4,262     
   $989,375   $666,896 

 

Note 4 - Line-of-Credit

 

The Company entered into a line-of-credit with a bank originally dated November 7, 2012 and amended it on November 5, 2016. On April 10, 2018 the Company refinanced its line-of-credit with a different bank and amended this agreement on July 10, 2019. The available principal balance under the line-of-credit is $6,000,000, and the outstanding balance accrues interest at a variable rate based on the bank’s prime rate plus 1% (5.0% at September 30, 2019 and 5.25% at September 30, 2018) but at no time less than 4.0%. Monthly interest payments are required, with any outstanding principal due on July 10, 2020. The Company maintains a minimum balance at the lender to cover two months of interest payments. The line-of-credit is collateralized by all assets of the Company as well as certain cash assets of two shareholders in control accounts at the lender. One control account has a balance of $2,000,000 and the other control account has a balance of $4,000,000. The shareholder with the $2,000,000 control account has a collateral agreement with the Company which is described in Note 6. The shareholder with the $4,000,000 control account at the lender personally guarantees the full amount of the loan. The outstanding balance on the line-of-credit at September 30, 2019 and 2018 was $6,000,000.

 

 

 

 F-14 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

Note 5 - Notes Payable to Related Parties and Convertible Notes

 

During 2017 and 2018, the Company entered into notes payable (the "Notes") in the amount of $330,000 and $40,000 with a related party for a combined sum of $370,000. The Notes did not accrue interest and did not have a stated maturity date. During 2018, the Notes, with an outstanding balance of $370,000, were converted into 342,861 shares of Series B preferred and subsequently converted into 3,217,065 shares of Series C preferred at $0.115 per share in connection with the Series C stock exchange.

 

During 2019, the Company entered into notes payable (the "Notes") with three related parties for $80,000, $200,000 and $50,000, respectively. As of September 30, 2019 the outstanding notes payable was $330,000. The Notes do not accrue interest or have a stated maturity date and are expected to be repaid as cash flow permits.

 

During the period January 1 to September 30, 2019, investors purchased $462,500 of convertible notes. These convertible notes accrue interest at 6.0% per year and mature on March 31, 2020. In the event of an Initial Public Offering (IPO) before March 31, 2020, the Notes will automatically convert into Common Stock at a 50% or 75% discount to the IPO price.

 

In connection with the collateral agreement described in Note 6, in January of 2019 the Company converted accrued fees of $725,000 into an unsecured note payable which bears interest at 33% annually and has a maturity date of March 31, 2020. The note payable is convertible into common stock at a 75% discount to the IPO price.

 

Note 6 - Related Party Transactions

 

The Company has entered into related party transactions as described in Note 4 – Line-of-Credit and Note 5 – Notes Payable to a Related Party.

 

The Company also entered into an agreement with a shareholder in 2017 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 fees accruing on the collateral arrangement are 33% percent of the collateral amount annually plus there is an annual renewal fee of $50,000, with $605,621 and $422,549 being recorded as interest expense for the nine months ended September 30, 2019 and 2018 respectively. The balance outstanding on the collateral at September 30, 2019 and 2018 was $806,161 and $17,605, respectively. The collateral agreement expires and automatically renews on the effective date each year, which is April 13th. The next expiration and renewal will be on April 13, 2020.

 

The collateral agreement requires an annual commitment to the shareholder to pay collateral fees of $710,000 (annual interest of $660,000 plus the $50,000 renewal fee) and issue 300,000 in common stock warrants.

 

Note 7 - Commitments and Contingencies

 

Operating Lease

 

The Company leases office space under a non-cancelable operating lease. Rent expense for the nine months ended September 30, 2019 and 2018 was $117,178 and $114,150 respectively. Subsequent to September 30, 2019, the Company entered into a new sublease, with a cost of approximately $5,500 per month, which will expire in in March 2021.

 

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.

 

 

 

 F-15 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

Collateral Fees

 

The Company has a commitment to pay annual collateral fees as described in Note 6.

 

Note 8 - Members' Equity

 

Membership Interests

 

The ownership of the Company is represented by shares. The Company has authorized two classes of shares. These classes include common shares and preferred shares (collectively, the "Shares"). There are two authorized series of Common shares and four authorized series of Preferred shares. Common shares include Series 1 Common Shares ("Series 1") and Series 2 Common Shares ("Series 2"). Preferred shares include Preferred A Shares ("Series A"), Preferred B Shares ("Series B"), Preferred C Shares (“Series C”) and Preferred F Shares ("Series F").

 

The Preferred F Shares (“Series F”) have similar attributes and rights as the Common shares and are considered a second class of Common shares for the purpose of the pro forma net loss per share computation in Note 9. The Company, upon approval of the Series F shareholder, has the authority to issue additional Shares. Holders of Shares have no redemption rights.

 

During 2018, the Company approved a stock exchange as described in Note 1 of the Company’s December 31, 2018 audited financial statements which was treated in substance as a stock split of 9.07:1.00 for authorized and outstanding Shares participating in a pay to play financing with all share and per-share amounts for Series F, Series 1 Common Shares and options.

In 2018, 186,271,597 shares of Series C were issued at $0.115 per share in exchange for 5,300,000 Series A shares and 28,154,567 common warrants and 15,230,334 Series B shares and 21,731,741 common warrants. As a result of the exchange, the Series A shares received an increase in value based upon the incremental fair value of the securities received over those exchanged which resulted in a deemed dividend of $3,228,200 to the Series A preferred holders. There was no incremental fair value attributable to the Series B holders.

 

In 2019, 31,799,648 shares of Series 1 Common shares were issued for cash proceeds of $731,392 at $0.023 per share. A total of 31,666,865 of these Series 1 Common shares issued reduced the Series F shares outstanding so that only 132,783 of the Series 1 Common shares issued were dilutive to the existing shareholders. During 2019 the Company also granted 2,165,426 warrants to non-participants of Series A and B shares and 2,721,900 warrants to participants of Series A and B shares.

 

In 2019, an additional 127,045 shares of Series B were issued at $1.0435 per share or $108,779, net of $23,792 in issuance costs, to four shareholders in connection with an extension of the 2018 pay to play financing. Subsequently the 127,045 shares of Series B were converted into 1,152,675 Series C shares at a conversion of 9.07:1.00 for the pay to play as detailed in Notes 1 and 8. The four shareholder signers received 12,008,056 Series C shares being issued at $0.115 per share in exchange for 1,050,000 Series A shares, 146,452 Series B shares and the additional Series B shares of 127,045. The four new shareholder participants also forfeited and exchanged 2,392,900 previously issued Series 1 Common warrants issued in October 2018 for giving consent to the pay to play dilution as non-participants and as a result of subsequently electing to participate in 2019 in the extension of the pay to play financing, received common warrants totaling 177,323 new Series 1 Common warrants which combined with the Series C preferred shares received resulted in excess incremental fair value over the Series A preferred shares exchanged, resulting in a deemed dividend of approximately $594,000. There was no incremental fair value associated with the holders of Series B preferred shares.

 

 

 

 F-16 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

In 2019 one additional shareholder that did not participate in the pay to play financing gave his consent to the dilutive financing and received 2,165,426 Series 1 Common warrants price at $0.023 per share. The accounting impact was identical to the previous non-participants that gave consent to the transaction and resulted in a deemed dividend of approximately $44,000.

 

As of September 30, 2019, 6,460,878 options were available for future issuance under the Plan.

 

The following table presents the activity for options outstanding:

 

        Weighted 
    Non-Qualified   Average 
    Options   Exercise Price 
Outstanding - December 31, 2018    27,749,840   $0.0160 
Granted    31,495,497    0.0243 
Forfeited/canceled    (5,867,839)   0.0164 
Exercised         
Outstanding - September 30, 2019    53,377,498   $0.021 

 

The following table presents the composition of options outstanding and exercisable:

 

      Options Outstanding    Options Exercisable 
 Exercise Prices    Number    Price*    Life*    Number    Price* 
$0.015    12,287,264   $0.015    4.45    12,287,264   $0.015 
$0.017    9,894,737    0.017    7.75    9,428,315    0.017 
$0.024    31,195,497    0.024    9.87    18,549,560    0.024 
 Total – September 30, 2019    53,377,498   $0.021    7.63    40,265,139   $0.019 

 

*Price and Life reflect the weighted average exercise price and weighted average remaining contractual life, respectively.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions used for the period ended September 30, 2019:

 

Approximate risk-free rate 1.5%
Average expected life 5.0 - 6.5 years
Dividend yield 0.00%
Volatility 109%

 

 

 

 F-17 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

The Company utilized a weighted average of comparable published volatilities to estimate the expected volatility and applied the simplified method to determine the expected term with the risk-free interest rate based upon the U.S. Treasury yield curve in effect at the time for the grant. The Company has assumed a zero percent forfeiture rate for options issued during the period ended September 30, 2019.

 

Warrants

 

The following table presents the activity for warrants outstanding:

 

   Series 1   Weighted 
   Common Share   Average 
   Warrants   Exercise Price 
Outstanding - December 31, 2018   62,223,204    0.011 
Granted – non-participants of Series A and B shares   2,165,426    0.023 
Granted – participants of Series A and B shares   2,899,223    0.023 
Forfeited/canceled   (2,392,900)   0.023 
Exercised        
Outstanding - September 30, 2019   64,894,953   $0.011 

 

All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 1.28 years as of September 30, 2019.

 

Note 9 – Pro Forma Net Loss Per Share

 

We compute net loss per share using the two-class method required for multiple classes of common stock and participating securities. Our participating securities include Series A convertible preferred stock. The Series 1 and Series 2 of common stock have been classified as Class A common stock. The Series F convertible preferred stock has attributes and rights similar to common stock and therefore common stock and Series F preferred stock are considered participating and are treated as a second class of common stock. The Series A convertible preferred stock did not have a contractual obligation to share in net losses, and as a result, net losses were only allocated to Class A and Series F preferred stock participating common stock securities.

 

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.

 

If converted the Series A, B and C convertible preferred stock would convert at the original issue price at any time into Series 1 common stock at the option of the holder. Diluted net loss per share attributable to common stockholders is computed by dividing the resulting net loss attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.

 

 

 

 F-18 

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Notes to Financial Statements

For the nine months ended September 30, 2019 (Unaudited)

 

For the nine months ended September 30, 2019 and 2018 our potential dilutive shares relating to stock options shares, convertible Series 1 common stock warrants, and Series A, B, and C convertible preferred stock were not included in the computation of diluted net loss per share as the effect of including these shares in the calculation would have been anti-dilutive.

 

The numerators and denominators of the basic and diluted pro forma net loss per share computations for our common stock and series are calculated as follows for the nine months ended September 30, 2019 and 2018:

 

   For the Nine Months Ended September 30, 
   2019   2018 
    Class A    Class B     Class A    Class B  
    Common (1)    Common (2)    Common (1)    Common (2) 
Numerator                    
                     
Net loss  $(3,133,817)  $(3,133,817)  $(2,561,871)  $(2,561,871)