Table of Contents

 

 

As filed with the Securities and Exchange Commission on January 28, 2020

Registration No. 333-235891

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT No. 1 to

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) 219-9771

 

 

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) (3)

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.
(3) Previously Paid

 

 

 

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 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 63.

 

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 7 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 22
Dividend Policy 23
Corporate Conversion 23
Cash and Capitalization 24
Dilution 26
Management Discussion and Analysis of Financial Condition and Results of Operations 28
Business 36
Management 42
Compensation of our Executive Officers and Directors 48
Certain Relationships and Related Persons Transactions 54
Principal Stockholders 56
Description of Capital Stock 57
Shares Eligible for Future Sale 61
Underwriting 64
Legal Matters 69
Experts 69
Where you can find more Information 69
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  

 

 

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 it expects 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 will allow 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 will 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.

  

 

 

  2  
 

 

 

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 7 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 our sale 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 25.7% 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 (the “Jobs Act”). 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) 219-9771. 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 (“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.

 

 

 

  4  

 

 

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 the IPO 8,769,853 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 7 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, and excludes 588,281 shares of our common stock reserved for issuance under our 2019 Equity Incentive Plan, and 641,866 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.

 

 

 

 

  5  

 

 


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.

 

 

 

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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.

 

 

 

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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.

 

 

 

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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 25.7% 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. 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 8,769,853 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 588,281 common shares reserved for issuance upon the exercise of common share purchase options and 641,866 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 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. Our certificate of incorporation also provides that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. Despite the fact that the certificate of incorporation provides for these exclusive forum provisions 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. However, there is uncertainty as to whether a court would enforce these provisions and that investors cannot waive compliance with the federal securities laws and rules and regulations thereunder.

 

The choice of forum provisions 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 provisions 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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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.

 

 

 

 

 

 

 

 

 

 

 

 

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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. 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. In addition, all of our convertible debt will convert to equity as well as the balance outstanding of accrued fees to a related party.

 

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. We do not currently plan to repay the remaining $2.0 million of bank debt that will still be outstanding after the IPO during the remainder of 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 6,769,853 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:     813,736,854  
Common Stock Shares After Conversion:     6,769,853  
Shares of restricted common stock to be issued for:        
Series A Preferred shares     20,768  
Series B Preferred shares     21,568  
Series C Preferred shares     1,494,282  
Series F Preferred shares     1,210,610  
Conversion of related party notes and accrued fees    

1,452,062

 
Conversion of Convertible Notes     1,556,419  
Conversion of Series 1 & 2 Common Shares     1,014,144  
Common shares reserved for option and warrant exercise        
Options     588,281  
Warrants     641,866  
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, $0.001 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 related party notes and accrued fees 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     806,161       (806,161 )      
Bank Debt     6,000,000       (4,000,000 )     2,000,000  
Notes payable to related parties     1,055,000       (1,055,000 )        
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       (2,328,398 )     10,000  
  Subscriptions Receivable     (184,656 )     184,656        
Additional Paid in Capital     4,751,541       46,582,068       51,333,609  
Accumulated members’ deficit     (47,215,177 )         (47,215,177 )
     Total members’ equity (deficit)   $ (7,595,229 )           $ 4,128,432  

 

 
(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.

 

 

 

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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:

 

Outstanding LLC Membership Units:     813,736,854  
Common Stock Shares After Conversion:     6,769,853  
Shares of restricted common stock to be issued for:        
Series A Preferred shares     20,768  
Series B Preferred shares     21,568  
Series C Preferred shares     1,494,282  
Series F Preferred shares     1,210,610  
Conversion of related party notes and accrued fees     1,452,062  
Conversion of Convertible Notes     1,556,419  
Conversion of Series 1 & 2 Common Shares     1,014,144  
Common shares reserved for option and warrant exercise        
Options     588,281  
Warrants     641,866  
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.

 

 

 

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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 was largely attributed to (i) the loss of two major customers for our current platform in mid 2018, resulting in total Platform fees declining to $560,178 from $715,995 in 2018 vs. 2017, respectively, and (ii) a corresponding decrease in advertising revenue, which totaled $867,341 in 2018, compared to $1,220,444 in 2017, a decline of $353,104.

 

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 in mid 2018, such that Platform fees decreased to $175,782 in 2019 from $478,903 in the nine months ended September 30, 2018 and (ii) a corresponding decrease in advertising revenue, which caused advertising revenue from the loss of the two customers to decline to $183,958 in the nine month period ended September 30, 2019 vs $711,182 in the corresponding period in 2018. In the future, the company will continue to operate its legacy business and we do not expect to experience similar decreases in either Platform or Advertising revenues.

 

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 two major 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 primarily impacted 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 American Institute of CPA’s 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, along with the repayment $4 million of indebtedness by a stockholder upon the date of this prospectus, 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)   $ 66,000       66,000       66,000       -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 to apply of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for public entities. Accordingly, our financial statements may not be comparable to other public companies that do not elect 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 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 company maintains a large radio broadcasting company as its only major customer on its legacy platform. This customer generates approximately 70% of ongoing revenue. Our agreement with this major customer extends to March 2021 with an auto-renewal term. This customer is expected to continue to generate revenue for the company through at least the period of the current agreement. While our existing 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 and Executive Chairman. 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 senior management to establish the strategic vision of the company, prioritizing product launches, working with the CEO and CFO on the financial plans of the Company, and assisting the CEO in recruitment and hiring of senior executives 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., 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 its chairman. 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 chairman. 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 its chairman. 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 Chairman of the Board and 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 and Executive Chairman   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 - Chief Executive Officer   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 - Chief Technology Officer   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 75,068 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, (“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; and

 

  ·   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 was paid on January 30, 2020.

 

During 2019, the Company entered into new notes payable with Jeffrey Thramann for $80,000. The $80,000 note was repaid to Mr. Thramann in January 2020.

 

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 6,769,853 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 8,769,853 shares of common stock to be outstanding immediately after the consummation of this IPO, which excludes outstanding warrants of 641,866 and 588,281 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)     1,441,573       21.3%       25.6% (4)
Richard Minicozzi     1,570,020       23.2%       17.9%  
                         
Executive Officers and Directors:                        
Michael Lawless (2)     251,656       3.7%       2.9%  
Peter Shoebridge (3)     75,068       1.0%       >1%  
Richard Liebman           %       %  
Stephen Deitsch           %       %  
James Booth           %       %  
              %       %  
All directors and executive officers as a group (6 persons)     1,768,297       26.1%       29.3%  

 

(1) Includes 230,963 shares that may be received upon the exercise of warrants
(2) Includes 219,800 of shares that may be received upon the exercise of stock options
(3) Includes 75,068 of shares that may be received upon the exercise of stock 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 100,000,000 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 6,769,853 shares of our common stock outstanding (including 6,769,853 shares of restricted common stock) and approximately 109 stockholders of record. No shares of our preferred stock are designated, issued or outstanding.

 

Warrants

 

Upon completion of this offering, we will have 641,866 outstanding warrants as follows:

  

No. of Warrants Exercise Price
267,832 $           0.112092
4,481 $           1.017171
311,079 $           1.569495
51,737 $           2.339493
4,157 $           2.471726
2,581 $         14.240395

 

All of these warrants will expire in October 2023. None of these warrants may be exercised for a period of six months from the date of this prospectus.

 

The warrants have a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the underlying shares at the time of exercise of the warrant after deduction of a number of shares equal in value to the aggregate exercise price. The warrants contain provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations.

 

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. Our certificate of incorporation also provides that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. 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. However, there is uncertainty as to whether a court would enforce these provisions and that investors cannot waive compliance with the federal securities laws and rules and regulations thereunder.

 

Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.

 

 

 

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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   4,969,853   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.”

 

 

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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.

 

 

 

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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.

 

 

 

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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,

 

 

 

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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.

 

 

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

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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-5  
Notes to Condensed Financial Statements for the nine months ended September 30, 2019 (Unaudited)     F-7  
         
         
Financial Statements for the year ended December 31, 2018        
Report of Independent Registered Public Accounting Firm     F-23  
Balance Sheets     F-24  
Statements of Operations     F-25  
Statement of Changes in Members' Deficit     F-26  
Statements of Cash Flows     F-27  
Notes to Financial Statements     F-28  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  F-1  

 

  

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Condensed Balance Sheets

  

    September 30,     Pro Forma September 30,  
    2018     2019     2019 (Note 1)  
                   
Assets                  
Current assets                        
Cash   $ 446,186     $ 85,083     $ 85,083  
Accounts receivable, net     86,913       21,855       21,855  
Total current assets     533,099       106,938       106,938  
                         
Non-current assets                        
Capitalized software, net     1,185,531       1,601,818       1,601,818  
Property and equipment, net     10,977       1,457       1,457  
Security deposits     20,614       7,594       7,594  
Total non-current assets     1,217,122       1,610,869       1,610,869  
Total assets   $ 1,750,221     $ 1,717,807     $ 1,717,807  
                         
Liabilities and Members' Deficit                        
Current liabilities                        
Accounts payable and accrued liabilities   $ 666,896     $ 989,375     $ 989,375  
Line-of-credit     6,000,000       6,000,000       2,000,000  
Subscription escrow payable     500,000              
Convertible notes payable           462,500        
Notes payable to related parties           1,055,000        
Accrued fees to a related party     742,605       806,161        
Total current liabilities     7,909,591       9,313,036       2,989,375  
                         
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 - Series 1 and 2     71,967       2,338,398        
Common stock, $0.001 par value, 8,800,000 shares outstanding pro forma                 8,800  
Additional paid-in capital     1,373,833       4,751,541       45,934,809  
Accumulated deficit     (37,242,871 )     (47,215,177 )     (47,215,177 )
Subscription receivable           (184,656 )      
Total members' deficit     (6,159,280 )     (7,595,229 )     (1,271,568 )
Total liabilities and members' deficit   $ 1,750,221     $ 1,717,807     $ 1,717,807  

 

 

 

See notes to financial statements.

 

 

  F-2  

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Condensed Statements of Operations

 

   

For the Nine Months Ended

September 30,

 
    2018     2019  
             
Revenue   $ 1,225,086     $ 382,233  
Operating expenses:                
Direct cost of services     1,378,512       747,510  
Sales and marketing     168,294       111,947  
Research and development     240,284       175,757  
General and administrative     1,200,093       1,527,966  
Total operating expenses     2,987,183       2,563,180  
                 
Loss from operations     (1,762,097 )     (2,180,947 )
                 
Other (expense) income                
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 )

 

 

Pro Forma weighted average common shares outstanding (Note 9)            
Basic – Class A Common Shares     4,388,024       95,384,986  
Basic – Series F Preferred Shares     117,722,097       83,076,484  
Diluted – Class A Common Shares     4,388,024       95,384,986  
Diluted – Series F Preferred Shares     117,722,097       83,076,484  
                 
Pro Forma Net loss per share attributable to common shares                
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 )
                 
Weighted-average common shares used to compute pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Notes 10):                
Basic             7,493,457  
Diluted             7,493,457  
                 
Pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Note 10):                
Basic           $ (0.42 )
Diluted           $ (0.42 )

 

 

 

 

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  
             
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  
Changes in assets and liabilities                
Accounts receivable     173,409       73,045  
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 )
Net cash used in investing activities     (607,010 )     (578,070 )
                 
Cash flows from financing activities                
Proceeds from issuance of preferred shares, net of issuance costs     2,076,610       108,779  
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  
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  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 323,250     $ 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   $ 370,000     $  
Series B preferred shares issued for foregone compensation   $ 137,515     $  
Common stock shares issued for severance compensation   $ 11,250     $  

 

See notes to financial statements.

 

 

  F-4  

 

 

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-5  

 

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-6  

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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.

 

Pro Forma Balance Sheet Information

 

The pro forma balance sheet information as of September 30, 2019 presents the Company’s members’ deficit as though all of the Company’s redeemable convertible Series A, B, C and F preferred shares outstanding, Series 1 and 2 common shares, convertible notes payables, related party notes payable and accrued fees to a related party, stock options and warrants had automatically converted into an aggregate of 8,000,000 shares of the Company’s common stock, upon a corporate conversion and the completion of a qualifying initial public offering (“IPO”) of the Company’s common stock. Additionally, the pro forma balance sheet gives effect to the issuance of 800,000 shares of common stock for the repayment of $4,000,000 of the Company’s bank debt by a stockholder in connection with the corporate conversion. The shares of common stock issuable and the proceeds expected to be received by the Company upon the completion of a qualifying IPO are excluded from such pro forma financial information.

 

The pro forma balance sheet information as of September 30, 2019 has been prepared to give effect to:

 

· the Conversion of the Convertible Notes into 1,556,419 shares of common stock;
· the Conversion of A Preferred shares into 20,768 shares of common stock;
· the Conversion of B Preferred shares into 21,568 shares of common stock;
· the Conversion of C Preferred shares into 1,494,282 shares of common stock;
· the Conversion of F Preferred shares into 1,210,610 shares of common stock;
· the Conversion of Series 1 and 2 Common shares into 1,014,144 shares of common stock;
· the Issuance of 800,000 shares of common stock for the repayment of $4 million of bank debt by a stockholder;
· the Conversion of related party notes payable and accrued fees to a related party into 1,452,062 shares of common stock.

 

 

  F-7  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO

 

Pro forma basic net loss per share attributable to common stockholders is computed to give effect to (i) the automatic conversion of all redeemable convertible Series A, B, C and F preferred shares outstanding, Series 1 and 2 common shares, convertible notes payables, related party notes payable and accrued fees to a related party ,stock options and warrants had automatically converted into an aggregate of 8,000,000 shares of common stock and (ii) the issuance of 800,000 shares of common stock for the repayment of $4,000,000 of bank debt by a stockholder. For purpose of the pro forma net loss per share calculation the weighted-average shares used in the computation of net loss per share attributable to common stockholders were adjusted for the reserve stock split in connection with the corporate conversion using the ratio of 101.717107 as described in Note 10.

 

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.

 

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, 2018, and 2019, the allowance for doubtful accounts was $15,000 and $2,500, respectively.

 

 

  F-8  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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 23.3% and 64.8% of accounts receivable at September 30, 2018 and 2019, respectively. Two and three customers accounted for approximately 72.2% percent and 83.2% percent of revenues as of and for the period ended September 30, 2018 and 2019, 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.

 

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 $607,010 and $578,070 were capitalized for the nine months ended September 30, 2018 and 2019. Amortization of capitalized software development costs were $188,507 and $295,856 for the nine months ended September 30, 2018 and 2019, 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.

 

 

 

 

  F-9  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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, 2018 and 2019 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.

 

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.

 

 

 

 

  F-10  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

Geographic Locations & Segments

 

For the nine months ended September 30, 2018 and 2019, 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 an 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.

 

Liquidity and Capital Resources

 

In the nine months ended September 30, 2019, the Company generated negative cash flow from operations of ($1,406,242) 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.

 

 

 

 

  F-11  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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 $1,342,187, of funds as described in Subsequent Events (Note 11) 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

 

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.

 

 

 

 

  F-13  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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.

 

The following table presents revenues disaggregated by revenue source:

 

    Nine months Ended September 30,  
    2018     2019  
Revenues                
Development Service Fees (app and web design, development)   $     $ 15,290  
Platform Service Fees (hosting services, support, data analytics)     492,988       179,303  
Digital advertising served by 3rd parties     421,630       172,697  
Digital advertising served by Clip Interactive     310,468       14,943  
    $ 1,225,086     $ 382,233  

 

Note 3 – Balance Sheet Disclosures

 

Accounts payable and accrued liabilities consist of the following:

 

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

 

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% (5.25% at September 30, 2018 and 5.0% 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 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, 2018 and 2019 was $6,000,000.

 

 

 

  F-14  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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 $422,549 and $605,621 being recorded as interest expense for the nine months ended September 30, 2018 and 2019 respectively. The balance outstanding on the collateral at September 30, 2018 and 2019 was $17,605 and $806,161, 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.

 

 

 

  F-15  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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, 2018 and 2019 was $114,150 and $117,178 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.

 

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.

 

 

  F-16  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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.

 

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  

 

 

 

  F-17  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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%

 

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.

 

 

 

  F-18  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended 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.

 

For the nine months ended September 30, 2018 and 2019 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.

 

 

 

 

 

 

 

  F-19  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

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, 2018 and 2019:

 

    For the Nine Months Ended September 30,  
    2018     2019  
    Class A     Class B     Class A     Class B  
    Common (1)     Common (2)     Common (1)     Common (2)  
Numerator                                
                                 
Net loss   $ (2,561,871 )   $ (2,561,871 )   $ (3,133,817 )   $ (3,133,817 )
Preferred stock dividends     (1,170,273 )     (1,170,273 )     (2,025,920 )     (2,025,920 )
Attributable Loss     (3,732,144 )     (3,732,144 )     (5,159,737 )     (5,159,737 )
                                 
Net loss allocated to Class A common           134,115             2,757,802  
Net loss allocated to Class B common     3,598,029             2,401,935        
Net loss allocated to Preferred shares (3)                        
                                 
Net loss attributable to each class of common   $ (134,115 )   $ (3,598,029 )   $ (2,757,802 )   $ (2,401,935 )
                                 
Denominator                                
                                 
Weighted average basic shares outstanding     4,388,024       117,722,097       95,384,986       83,076,484  
Potential diluted shares                        
Weighted average diluted shares outstanding     4,438,024       117,722,097       95,384,986       83,076,484  
                                 
Net loss per share                                
Basic   $ (0.03 )   $ (0.03 )   $ (0.03 )   $ (0.03 )
Diluted   $ (0.03 )   $ (0.03 )   $ (0.03 )   $ (0.03 )

_______________________

(1) Class A common stock includes series 1 and series 2 common shares

(2) Class B common stock includes series F preferred shares as common shares

(3) Series A, Series B, Series C of preferred shares were not contractually obligated to participate in losses.

 

 

 

 

  F-20  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

Preferred stock dividends consist of the following:

    September 30,  
    2018     2019  
Series B accumulating preferred stock dividends   $ 1,170,273     $ 193,196  
Series C accumulating preferred stock dividends           1,194,203  
Deemed dividend to Series A preferred stockholders for conversion of Series A into Series C preferred stock           638,521  
    $ 1,170,273     $ 2,025,920  

 

The following potentially dilutive weighted average shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

    September 30,  
    2018     2019  
Stock Option Shares     34,650,667       27,570,475  
Convertible Series 1 Common Warrants     59,399,558       63,819,916  
Convertible Voting Preferred Shares – Series A, B, and C     24,097,615       199,831,838  
      118,147,840       291,222,229  

 

Note 10 – Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO

 

Pro forma net income per share as of the period September 30, 2019 upon completion of a qualifying IPO is computed as follows (in millions, except share amounts which are reflected in thousands, and per share amounts):

 

 

    Period Ended  
    September 30,  
    2019  
Numerator:        
Pro forma net loss attributable to common shares - basic   $ (3,133,817 )
Pro forma net loss attributable to common shares - diluted   $ (3,133,817 )
         
Denominator:        
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic(1)     937,748  
Pro forma adjustment to reflect automatic conversion of all convertible preferred shares to common stock     2,747,228  
Pro forma adjustment to reflect convertible notes to common stock     1,556,419  
Pro forma adjustment to reflect shares issued to a stockholder for repayment of $4M of bank debt     800,000  
Pro forma adjustment to reflect conversion of related party notes payable and accrued fees to related party     1,452,062  
Weighted-average shares used to compute pro forma per share - basic     7,493,457  
Pro forma net loss per share attributable to common shares - basic   $ (0.42 )
Weighted-average share used to compute pro forma net loss per share – dilutive     7,493,457  
Pro forma net loss per share attributable to common shares – diluted   $ (0.42 )

 

______________________

(1)      The weighted-average shares were recomputed for the reverse stock split using the ratio of 101.717107.

 

 

 

  F-21  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the Nine Months Ended September 30, 2019

 

Note 11 - Subsequent Events

 

The Company has evaluated all subsequent events through January 27, 2020, which is the date the financial statements were available for issuance and, concluded there were no material subsequent events requiring disclosure except those described below.

 

In July 2019, the Company initiated a financing in the amount of $2.0 million in the form of a 6% Convertible Promissory Notes that were originally due December 31, 2019. Subsequently, a majority of noteholders, voted to extend the due date from December 31, 2019 to March 31, 2020.

 

In October 2019 the Company obtained a $400,000 non interest short term loan from a related party. The Company was advanced $200,000 net of $12,000 in closing fees and the remainder $200,000 was put into an escrow account. On December 2019, the Company made a principal payment of $57,000. The remaining principal of $143,000 and the loan financing fees of $100,000, which total $243,000 as paid in January 2020.

 

Subsequent to September 30, 2019, the Company sold $75,000 of 6% Convertible Promissory Notes due March 31, 2020 to two new investors that convert mandatorily upon the date of the Company’s initial public offering (“IPO”) into common stock at a 50% discount to the IPO price. The Company also sold $865,068 of a new 6% Convertible Promissory Notes, due March 31, 2020, (“the 2020 Notes”) to existing investors with a mandatory conversion upon the date of the IPO into common shares at a 75% discount to the IPO price.

 

In November 2019, the Company sold $477,010 of Series 1 common shares to existing investors (the “Series 1 Investors”). In December 2019, after receiving the unanimous consent of the Series 1 Investors, the Company converted the common shares into the 2020 Notes described above.

 

Prior to September 30, 2019, the Company entered into notes payable agreement 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 the 2020 Notes, described above. Two other existing investors, who were owed $17,197 for services by the company, also agreed to convert his payable into the 2020 Notes, described above.

 

In November 2019, an investor defaulted on 25% or $23,414 of his Equity Note Receivable issued in connection with a financing round completed earlier in 2019. A total of 1,917,992 Series C Preferred shares were cancelled which were previously issued at a conversion rate of 9.07:1.00 for the series A and B preferred shares effectively reversing 25% of the earlier transaction. As a result the exchange transaction was rescinded resulting in 187,500 shares of Series A Preferred being re-issued at $1.00 per share and 23,896 shares of Series B Preferred shares were re-issued at $1.0435 per share in connection with the default. An additional 203,580 Series C Preferred shares at $0.115/share were also forfeited. The defaulting shareholder was reissued 422,792 shares of Series 1 Common Stock Warrants previously issued for giving consent to the pay to play dilution as a non-participant as a result of subsequently defaulting on his participation. The investor also forfeited 28,934 Series 1 Common Warrants.

  

 

 

  F-22  

 

 

 

 

Report of INDEPENDENT Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

Clip Interactive, LLC

Boulder, Colorado

 

opinion ON THE FINANCIAL STATEMENTS

 

We have audited the accompanying balance sheets of Clip Interactive, LLC (the "Company") as of December 31, 2018 and 2017, and the related statements of operations, changes in members’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

going concern uncertainty

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

BASIS FOR opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Plante & Moran PLLC

Plante & Moran PLLC

 

 

October 2, 2019

Denver, Colorado

 

We have served as the Company's auditor since 2015.

 

 

 

  F-23  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Balance Sheets

 

    December 31  
    2018     2017  
Assets            
Current assets            
Cash   $ 271,699     $ 46,053  
Accounts receivable, net     87,400       260,322  
Total current assets     359,099       306,375  
                 
Non-current assets                
Property and equipment, net of accumulated depreciation of $676,591 and $649,209     7,087       32,439  
Software development costs, net of accumulated amortization of $336,567 and $85,225     1,318,149       767,027  
Security deposits     20,614       20,614  
Total non-current assets     1,345,850       820,080  
                 
Total assets   $ 1,704,949     $ 1,126,455  
                 
Liabilities and Members' Deficit                
Current liabilities            
Accounts payable and accrued liabilities   $ 574,611     $ 625,002  
Line-of-credit     6,000,000       6,000,000  
Notes payable to a related party           330,000  
Total current liabilities     6,574,611       6,955,002  
                 
Long-term liabilities                
Accrued fees to a related party     875,540       500,877  
                 
Total liabilities     7,450,151       7,455,879  
                 
Commitments and contingencies                
                 
Members' deficit                
Series C preferred shares (liquidation preference of $35,510,665)     24,798,964        
Series B preferred shares (liquidation preference of $4,342,065)     2,836,688       17,639,079  
Series A preferred shares (liquidation preference of $2,975,000)     2,944,314       8,244,314  
Series F preferred shares            
Common shares     1,468,085       60,717  
Additional paid-in capital     4,611,868       1,237,193  
Accumulated deficit     (42,055,440 )     (33,510,727 )
Subscriptions receivable     (349,681 )      
Total members' deficit     (5,745,202 )     (6,329,424 )
                 
Total liabilities and members' deficit   $ 1,704,949     $ 1,126,455  

 

See notes to financial statements.

 

 

  F-24  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statements of Operations

 

 

    For the Years Ended  
    December 31,  
    2018     2017  
Revenue   $ 1,467,519     $ 1,988,204  
                 
Operating expenses                
Direct cost of services     1,697,211       1,882,571  
Sales and marketing     209,934       451,049  
Research and development     295,470       348,697  
General and administrative     1,567,703       942,807  
Total operating expenses     3,770,318       3,625,124  
                 
Loss from operations     (2,302,799 )     (1,636,920 )
                 
Other (expense) income                
Interest expense     (1,207,770 )     (1,080,734 )
Interest income     558        
Total other expense     (1,207,212 )     (1,080,734 )
                 
Net loss   $ (3,510,011 )   $ (2,717,654 )
                 
Pro Forma weighted average common shares outstanding (Note 9)                
Basic – Class A Common Shares     18,226,805       3,934,876  
Basic – Series F Preferred Shares     117,722,097       117,722,097  
Diluted – Class A Common Shares     18,226,805       3,934,876  
Diluted – Series F Preferred Shares     117,722,097       117,722,097  
                 
Pro Forma Earnings (loss) per share attributable to common shares (Note 9)                
Basic – Class A Common Shares   $ (0.06 )   $ (0.03 )
Basic – Series F Preferred Shares   $ (0.06 )   $ (0.03 )
Diluted – Class A Common Shares   $ (0.06 )   $ (0.03 )
Diluted – Series F Preferred Shares   $ (0.06 )   $ (0.03 )
                 
Unaudited Weighted-average common shares used to compute pro forma net loss per share attributable to common stockholders for IPA capitalization changes (Notes 10):                
Basic     6,734,900          
Diluted     6,734,900          
                 
Unaudited Pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Note 10):                
Basic   $ (0.52 )        
Diluted   $ (0.52 )        

 

See notes to financial statements.

 

 

 

  F-25  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

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, 2016         $       9,476,659     $ 10,879,395       8,275,000     $ 8,244,314       117,722,097     $  
Series B preferred shares issued for conversion of debt and accrued interest of $190,097 less issuance costs of $46,372                 4,866,483       5,031,802                          
Series B preferred shares issued to Clip Digital stockholders                 184,602       192,632                          
Series B preferred shares issued for cash                 247,246       258,001                          
Common share warrants issued in connection with debt                                                
Accumulation of dividends on Series B preferred shares                       1,277,249                          
Common share warrants issued in connection with a security interest                                                
Share-based compensation expense                                                
Net loss                                                
Balance - December 31, 2017         $       14,774,990      $ 17,639,079       8,275,000     $ 8,244,314       117,722,097     $  

 

 

 

    Common     Accumulated     Subscriptions        
    Shares     Amount     APIC     Deficit     Receivable     Total  
Balance - December 31, 2016     3,934,876     $ 60,717     $ 1,053,303     $ (29,323,192 )   $     $ (9,085,463 )
Series B preferred shares issued for conversion of debt and accrued interest of $190,097 less issuance costs of $46,372                                   5,031,802  
Series B preferred shares issued to Clip Digital stockholders                       (192,632 )            
Series B preferred shares issued for cash                                   258,001  
Common share warrants issued in connection with debt                 105,311                   105,311  
Accumulation of dividends on Series B preferred shares                       (1,277,249 )            
Common share warrants issued in connection with a security interest                 43,283                   43,283  
Share-based compensation expense                 35,296                   35,296  
Net loss                       (2,717,654 )           (2,717,654 )
Balance - December 31, 2017     3,934,876     $ 60,717     $ 1,237,193     $ (33,510,727 )   $     $ (6,329,424 )

 

See notes to financial statements.

 

 

 

 

 

 

 

 

  F-26  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

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     $  
Issuance of Series B preferred shares net of offering costs of $40,319                 2,049,396       2,098,226                          
Series B preferred shares issued for a note receivable                 235,967       246,231                          
Series B preferred shares issued for a conversion of debt                 354,576       370,000                          
Series B preferred shares issued for foregone compensation                 131,782       137,515                          
Common shares issued for severance                                                
Accumulating dividends on Series B preferred shares           319,894             1,294,156                          
Accumulated dividends converted to Series C from Series B preferred shares           3,055,666             (3,055,666 )                        
Conversion of Series A and Series B preferred shares for Series C preferred shares     186,271,597       21,423,404       (15,230,334 )     (15,892,853 )     (5,300,000 )     (5,300,000 )            
Common shares issued for cash                                                
Common shares issued for conversion of accrued interest                                                
Common shares issued for notes receivable                                                
Common share warrants issued to non-participating Series A and Series B shareholders                                                
Common share warrants issued in connection with a security interest                                                
Share-based compensation expense                                                
Net loss                                                
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     $  

 

 

 

 

  F-27  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statement of Changes in Members’ Deficit (continued)

 

    Common     Accumulated     Subscriptions        
    Shares     Amount     APIC     Deficit     Receivable     Total  
Balance - December 31, 2017     3,934,876     $ 60,717     $ 1,237,193     $ (33,510,727 )   $     $ (6,329,424 )
Issuance of Series B preferred shares net of offering costs of $40,319                                   2,098,226  
Series B preferred shares issued for a note receivable                             (246,231 )      
Series B preferred shares issued for a conversion of debt                                   370,000  
Series B preferred shares issued for foregone compensation                                   137,515  
Common shares issued for severance     680,474       11,250                         11,250  
Accumulating dividends on Series B preferred shares                       (1,614,050 )            
Accumulated dividends converted to Series C from Series B preferred shares                                    
Conversion of Series A and Series B preferred shares for Series C preferred shares                 2,997,649       (3,228,200 )            
Common shares issued for cash     51,672,086       1,188,458                         1,188,458  
Common shares issued for conversion of accrued interest     4,530,861       104,210                         104,210  
Common shares issued for notes receivable     4,497,827       103,450                   (103,450 )      
Common share warrants issued to non-participating Series A and Series B shareholders                 192,452       (192,452 )            
Common share warrants issued in connection with a security interest                 43,355                   43,355  
Share-based compensation expense                 141,219                   141,219  
Net loss                       (3,510,011 )           (3,510,011 )
Balance - December 31, 2018     65,316,124     $ 1,468,085     $ 4,611,868     $ (42,055,440 )   $ (349,681 )   $ (5,745,202 )

 

See notes to financial statements.

 

 

 

 

  F-28  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statements of Cash Flows

 

    For the Years Ended  
    December 31,  
    2018     2017  
Cash flows from operating activities:                
Net loss   $ (3,510,011 )   $ (2,717,654 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization     278,724       159,254  
Bad debt provision     (40,000 )     (50,500 )
Share-based compensation     141,219       35,296  
Interest expense on warrants issued     43,355       148,594  
Accrued interest converted into Series B preferred stock           173,052  
Series B issued for deferred wages     137,515        
Issuance of common stock for severance     11,250        
Changes in assets and liabilities                
Accounts receivable     212,922       (102,168 )
Accrued fees to a related party     374,663       500,877  
Accounts payable and accrued liabilities     53,817       (72,348 )
Net cash used in operating activities     (2,296,546 )     (1,925,597 )
                 
Cash flows from investing activities                
Software capitalization     (802,464 )     (852,252 )
Purchase of property and equipment     (2,029 )      
Net cash used in investing activities     (804,493 )     (852,252 )
                 
Cash flows from financing activities                
Proceeds from issuance of preferred shares     2,138,546       258,001  
Proceeds from conversion of notes payable           1,528,378  
Proceeds from issuance of common shares     1,188,458        
Proceeds from related-party debt     115,000       335,000  
Payments of related-party debt     (75,000 )     (5,000 )
Equity issuance costs on Series B preferred shares     (40,319 )     (46,372 )
Net cash provided by financing activities     3,326,685       2,070,007  
                 
Net increase (decrease) in cash     225,646       (707,842 )
Cash - beginning of year     46,053       753,895  
Cash - end of year   $ 271,699     $ 46,053  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 675,459     $ 255,796  
Supplemental disclosure of non-cash activity:                
Series B preferred shares issued for conversion of debt and accrued interest   $ 370,000     $ 5,031,802  
Series B preferred shares issued to Clip Digital shareholders   $     $ 192,632  
Accumulation of dividends on Series B and Series C preferred stock   $ 1,614,050     $ 1,277,249  
Series B preferred shares issued for a note receivable   $ 246,231     $  
Series B preferred shares issued for foregone compensation   $ 137,515     $  
Deemed dividend charged to accumulated deficit for conversion   $ 3,228,200     $  
Common shares issued for conversion of accrued interest   $ 104,210     $  
Common shares issued for notes receivable   $ 103,450     $  
Common shares issued for severance   $ 11,250     $  
Warrants issued to non-participating Series A and Series B shareholders   $ 192,452     $  
Series B warrants issued in connection with debt   $     $ 105,311  
Warrants issued in connection with a security interest   $ 43,355     $ 43,283  

 

See notes to financial statements.

 

 

 

  F-29  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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

 

Clip Interactive, LLC (the "Company" or "Clip") was formed January 14, 2012. Clip is a technology company that makes radio broadcasts and streaming audio content digitally actionable and measurable. By turning a traditional media channel that reaches 245 million people each week in the U.S. into a digital marketing channel, Clip increases the value of radio's core asset: the audio "spot" (radio ad).

 

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.

 

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.

 

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. As of the balance sheet date and periodically throughout the year, the balance of cash exceeded the federally insured limit.

 

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 December 31, 2018, and 2017, the allowance for doubtful accounts was $10,000 and $50,000, respectively.

 

 

 

  F-30  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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. Two and three major customers accounted for approximately 72 percent and 66 percent of accounts receivable at December 31, 2018 and 2017, respectively. Three and four customers accounted for approximately 74 percent and 73 percent of revenues as of and for the years ended December 31, 2018 and 2017, 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. 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. 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.

 

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 December 31, 2018 and 2017; as a result, no impairment has been recognized in the accompanying financial statements.

 

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.

 

 

 

  F-31  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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.

 

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, 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.

 

Interest and penalties associated with tax positions are recorded in the period assessed. No interest or penalties have been assessed as of December 31, 2018. The Company's information returns for tax years subject to examination by tax authorities include the date of the Company's inception through the current period for federal and state tax reporting purposes.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2018 and 2017 was 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-32  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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.

 

Unaudited Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO

 

Pro forma basic net loss per share attributable to common stockholders is computed to give effect to (i) the automatic conversion of all redeemable convertible Series A, B, C and F preferred shares outstanding, Series 1 and 2 common shares, convertible notes payables, related party notes payable and accrued fees to a related party ,stock options and warrants had automatically converted into an aggregate of 8,000,000 shares of common stock and (ii) the issuance of 800,000 shares of common stock for the repayment of $4,000,000 of bank debt by a stockholder. For purpose of the pro forma net loss per share calculation the weighted-average shares used in the computation of net loss per share attributable to common stockholders were adjusted for the reserve stock split in connection with the corporate conversion using the ratio of 101.717107 as described in Note 10.

 

The pro forma net loss per share information in the statement of operations as of December 31, 2018 has been prepared to give effect to:

 

· the Conversion of the Convertible Notes into 1,556,419 shares of common stock;
· the Conversion of A Preferred shares into 20,768 shares of common stock;
· the Conversion of B Preferred shares into 21,568 shares of common stock;
· the Conversion of C Preferred shares into 1,494,282 shares of common stock;
· the Conversion of F Preferred shares into 1,210,610 shares of common stock;
· the Conversion of Series 1 and 2 Common shares into 1,014,144 shares of common stock;
· the Issuance of 800,000 shares of common stock for the repayment of $4 million of bank debt by a stockholder;
· the Conversion of related party notes payable and accrued fees to a related party into 1,452,062 shares of common stock.

 

Geographic Locations & Segments

 

For the years ended December 31, 2018 and 2017, revenue attributable to customers in the United States were 100% and 100%, respectively. For the years ended December 31, 2018 and 2017, 100% of our net assets are located within the United States. The Company defines the term “chief operating decision maker” to be our Chief Executive Officer. Our Chief operating decision maker allocates resources and assesses financial performance based upon discrete financial information at the enterprise level. Accordingly, we have determined that we operate as a single operating and reportable segment.

 

Comprehensive Income (Loss)

 

The Company has no items comprising other comprehensive income or loss and accordingly comprehensive loss and net loss are identical for all periods presented.

 

 

 

  F-33  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 16-02, Leases, which will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right-to-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease-related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new lease guidance will be effective for the Company's year ending December 31, 2020 and will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The new lease standard could have a significant effect on the Company’s financial statements as a result of the Company's operating leases, as disclosed in Note 7, that will be reported on the balance sheet at adoption. Upon adoption, the Company will recognize a lease liability and corresponding right-to-use asset based on the present value of the minimum lease payments. The effects on the results of operations are not expected to be significant as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. ASU 2014-09 defines a five step process to achieve this core principle (that we should recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services provided) that requires more judgment and estimates within the revenue recognition process than are required under present U.S. GAAP. These judgments and estimates may include identifying each performance obligation in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. ASU 2016-12 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant additional judgments and changes in existing judgments.

 

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 in no cumulative effect adjustment to the opening balance of accumulative 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.

 

Note 2 – Going Concern and Uncertainty

 

The accompanying financial statements are presented assuming that the Company will continue as a going concern. However, during the fiscal year ended December 31, 2018 we incurred a net loss of approximately $3.5 million 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 in 2019 for operations totaling $1,656,463 as described in Subsequent Events (Note 11); however, will need to continue to secure additional funding. 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 3 - Balance Sheet Disclosures

 

Depreciation and expense for the years ended December 31, 2018 and 2017 was $278,724 and $159,254 respectively.

 

 

 

  F-34  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Accounts payable and accrued liabilities consist of the following:

 

    December 31,  
    2018     2017  
Accounts payable   $ 536,251     $ 589,419  
Accrued interest     33,166       23,083  
Credit cards payable     5,194       12,500  
    $ 574,611     $ 625,002  

 

Note 4 - Line-of-Credit

 

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 December 31, 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 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 December 31, 2018 and 2017 was $6,000,000.

 

Note 5 - Notes Payable to a Related Party

 

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 (Note 8).

 

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 paid by the Company on the collateral arrangement 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 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. The collateral agreement expires and automatically renews on the effective date each year which is April 13th. The next expiration and renewal is April 13, 2020.

 

 

 

  F-35  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Note 7 - Commitments and Contingencies

 

Operating Lease

 

The Company leases office space under a non-cancelable operating lease. Rent expense for the years ended December 31, 2018 and 2017 was approximately $153,000 and $140,000, respectively. Future minimum lease payments under this lease are approximately $39,000 in 2019. This lease expired on March 31, 2019 and is currently leased on a month-to-month basis.

 

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.

 

Collateral Agreement

 

So long as the bank credit agreement described in Note 4 remains outstanding and requires collateral under the collateral agreement described in Note 6 the Company has an annual commitment to the shareholder providing the collateral agreement to pay collateral fees of $710,000 and to issue 300,000 warrants to purchase common stock of the Company.

 

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.

 

At December 31, 2018 and 2017, there were 186,271,597 and no shares of Series C no par preferred authorized, issued and outstanding, liquidation preference of $ 35,510,665.

 

At December 31, 2018 and 2017, there were 2,316,377 and 14,774,990 shares of Series B no par value preferred authorized, issued and outstanding, liquidation preference of 1.5x original issue price of $1.0435 plus accumulated dividends which totaled $ 4,342,065 at December 31, 2018.

 

At December 31, 2018 and 2017, there were 2,975,000 and 8,275,000 shares of Series A no par value preferred authorized, issued and outstanding, liquidation preference of $1.00 per share which totaled $2,975,000 and $8,275,000 at December 31, 2018 and 2017, respectively.

 

 

 

  F-36  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

At December 31, 2018 and 2017, there were 117,722,097 shares of Series F no par value preferred authorized, issued and outstanding.

 

At December 31, 2018 and 2017, there were 65,316,124 and 3,934,876 shares of Common no par value authorized, issued and outstanding.

 

In 2012, 147,436,152 shares of Series F were issued to the founder in exchange for services rendered and personal guarantees on debt financing. These shares were valued at zero. During 2013, 29,714,055 shares of Series F were canceled to reduce future potential dilution to current shareholders in consideration of the need to raise future equity capital.

 

In 2012, 5,000,000 shares of Series A were issued at a price of $1.00 per share, net of issuance costs of $30,686. In 2014, 3,275,000 shares of Series A were issued at $1.00 per share. During 2018, shareholders consented to converting 5,300,000 shares of Series A to Series C. As of December 31, 2018 and 2017, there were 2,975,000 and 8,275,000 shares of Series A, respectively, authorized, issued, and outstanding.

 

In 2015, Convertible Notes in the amount of $6,000,000 were converted into 5,749,880 shares of Series B at $1.0435 per share.

 

In 2016 and 2015, 967,895 and 2,758,884 shares of Series B were issued for cash proceeds of $1,009,998 and $2,878,895, respectively, at $1.0435 per share. Offering costs of $62,035 and $100,742 were incurred with the issuance during 2016 and 2015, respectively.

 

In 2017, Convertible Notes in the amount of $4,888,077 plus $190,097 in accrued interest were converted into 4,866,483 shares of Series B at $1.0435 per share. Offering costs of $46,372 were incurred with the issuance during 2017. Also, in 2017, 184,602 shares of Series B were issued at fair value of $192,632 at $1.0435 per share to Clip Digital shareholders (a related party). This transaction was the result of termination of Clip Digital, LLC which triggered investor rights that converted Clip Digital LLC investment amounts into Series B shares of the Company and treated as a deemed dividend.

 

In 2018 and 2017, 235,967 and 247,246 shares of Series B were issued for subscription receivables and cash of $246,231 and $258,001, respectively, at $1.0435 per share.

 

During 2018, the Company approved a stock exchange as described in Note 1 which has been 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, 354,576 and 131,782 shares of Series B were issued in exchange of notes payable to a related party for $370,000 and foregone wages of $137,515 at $1.0435 per share.

 

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 2018, 51,672,086, 4,530,861 and 4,497,827 shares of Series 1 Common shares were issued at $0.023 per share for cash proceeds of $1,188,458, for conversion of accrued interest of $104,210, and for subscriptions receivable of $103,450, respectively.

 

In 2018 and 2017, 680,474 and 0 options were exercised as severance to purchase Series 1, respectively.

 

 

 

  F-37  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Voting Rights

 

Generally, the Company's Board has the authority to make all decisions and take all actions without a vote of the shareholders. However, a list of certain specific matters requiring a vote of the Series F shareholders have been identified in the Company's Amended and Restated Limited Liability Company Agreement. Included in this list are the consolidation, liquidation, dissolution, or merger of the Company as well as other specific matters. When a vote is required, it must be approved by shareholders with a majority of the Shares.

 

The number of authorized members of the Board shall initially be fixed at three designated as follows: (i) one director to be designated by the majority holders of Series F; (ii) two directors to be designated by the holders of the majority of the common shares and preferred shares, voting together. The number of directors may be changed from time to time by a vote of the holders of a majority of the Shares, voting together, and by a majority vote of the then serving directors.

 

Anti-Dilution Rights

 

If, at any time after the issuance of Series C, the Company issues additional securities for which the price per share of the additional securities sold is less than the Series C original issue price per share, the Company shall issue to each holder of Series C that number of additional shares of Series C necessary to maintain the holder's percentage interest in the Company that existed prior to the additional securities being issued. The anti-dilution rights shall terminate immediately prior to a qualified financing round.

 

Dividends

 

The Series C shall accrue cumulative dividends at a rate of 8% per annum, compounding daily, from the date of issuance, whether or not declared. Provided the Company shall first have paid or set aside Series dividends, the Series B shall accrue cumulative dividends at a rate of 8% per annum, compounding daily, from date of issuance, whether or not declared. No dividends shall be paid to Series A, Series F, or common shareholders.

 

Liquidation

 

Upon liquidation of the Company, which would occur only upon a judicial decree of dissolution or approval by the Company and the shareholders holding a majority of the Shares, the assets of the Company will be distributed in the following priority: (i) to all creditors of the Company to pay all debts, liabilities, and obligations; (ii) the Series C shareholders until the Series C preference amount is paid in full (1.5x original issue price of $0.115 per share plus accrued unpaid dividends); (iii) the Series B shareholders until the Series B preference amount is paid in full (1.5x original issue price of $1.0435 per share plus accrued unpaid dividends); (iii) to Series A shareholders until the Series A preference amount ($1.00 per share) is paid in full; and (iv) ratably to all common, Series F and Series A shareholders based on their percentage interest in the Company. Profits and losses of the Company, after allocation required by Treasury Regulations under Section 704(b), shall be allocated among the shareholders equal to each shareholder's liquidation preference. The Company's Board, at its discretion, may also distribute funds to the shareholders in the same manner as a liquidation event.

 

Equity Incentive Plan

 

The Company adopted the 2013 Equity Incentive Plan (the "Plan"), under which the Company is authorized to grant employees, directors, and consultants of the Company up to 34,012,500 common share incentive options, non-statutory options, profit interests, and restricted share awards. The award price and vesting terms are determined by the Board of the Company and evidenced in the award agreement extended to the employee, director, or consultant. The options granted generally terminate 10 years from the date of grant and vest over various periods as determined by the Board of the Company. Forfeited or canceled options are available for reissue.

 

As of December 31, 2018, there was approximately $23,000 of unrecognized share-based compensation expense related to unvested awards, which is expected to be recognized through 2021. The total fair value of options granted during the years ended December 31, 2018 and December 31, 2017 were approximately $149,000 and $23,000, respectively. Total share-based compensation expense recognized during the years ended December 31, 2018 and 2017 related to the Company's options was approximately $141,000 and $35,000, respectively. As of December 31, 2018, 1,649,153 options were available for future issuance under the Plan.

 

 

 

  F-38  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

The following table presents the activity for common share options outstanding:

 

            Weighted  
      Non-Qualified     Average  
      Options     Exercise Price  
Outstanding - December 31, 2016       25,044,764     $ 0.016  
Granted       1,690,648       0.017  
Forfeited/canceled       (330,756 )     0.017  
Exercised              
Outstanding - December 31, 2017       26,404,657       0.016  
Granted       10,707,770       0.017  
Forfeited/canceled       (8,682,112 )     0.016  
Exercised       (680,474 )     0.017  
Outstanding - December 31, 2018       27,749,840     $ 0.016  

 

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

 

      Options Outstanding     Options Exercisable  
Exercise Prices     Number     Price*     Life*     Number     Price*  
$0.015       22,322,976     $ 0.015       4.86       22,322,976     $ 0.015  
$0.017       5,426,951       0.017       8.52       4,276,968       0.017  
Total - December 31, 2018       27,749,840     $ 0.016       5.57       26,600,124     $ 0.004  

 

* 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 years ended December 31, 2018 and 2017:

 

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

 

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 years ended December 31, 2018 and 2017.

 

 

 

  F-39  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Warrants

 

During 2018, the Company approved a stock exchange as described in Note 1 and as a result of the exchange of Series A and Series B shares to Series C shares, the Company granted warrants to purchase 45,259,271 shares of Series 1 common stock to the Series A and B shareholders that participated. The non-participant shareholders of Series A and B were granted warrants to purchase 5,490,044 shares of Series 1 common stock. The fair value of the warrants was estimated using the Black-Scholes option pricing model with the following inputs: term of five years, discount rate of 2.5%, volatility of 109%, and a price of $0.023. The relative fair value of the warrants was estimated, and the warrants were valued accordingly at approximately $192,000.

 

In connection with the 2017 and 2018 renegotiation of the line-of-credit and related collateral agreements with shareholders (Note 4), the Company granted one of the shareholders warrants to purchase 2,721,898 and 2,721,898 shares of Series 1 with an exercise price of $0.001. All warrants vest immediately and expire during 2022 and 2023. The fair value of the warrants was estimated using the Black-Scholes option pricing model with the following inputs: term of five years, discount rate of 1.5%, volatility of 109%, and a price of $0.017. The relative fair value of the warrants was estimated, and the warrants were valued accordingly at approximately $43,000 and $43,000 and classified as interest expense.

 

In connection with convertible debt issued in 2016 and 2017, the Company granted warrants to purchase 6,030,092 shares of Series 1 with an exercise price of $0.001. All warrants vest immediately and expire in 2022. The fair value of the warrants was estimated using the Black-Scholes option pricing model with the following inputs: term of five years, discount rate of 1.5%, volatility of 109%, and a price of $0.017. The relative fair value of the warrants was estimated, and the warrants were valued accordingly at approximately $105,311 and classified as a discount to the Series B preferred stock.

 

No warrants were exercised during the years ended December 31, 2018 and 2017. The following table presents the activity for warrants outstanding:

 

    Series 1     Weighted  
    Common Share     Average  
    Warrants     Exercise Price  
Outstanding - December 31, 2016     5,516,924     $ 0.100  
Granted     5,956,965       0.001  
Forfeited/canceled            
Exercised            
Outstanding - December 31, 2017     11,473,889       0.010  
Granted – non-participants of Series A and B shares     5,490,044       0.023  
Granted – participants of Series A and B shares     45,259,271       0.011  
Forfeited/canceled            
Exercised            
Outstanding - December 31, 2018     62,223,204     $ 0.011  

 

All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 1.48 years as of December 31, 2018.

 

 

 

  F-40  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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.

 

For the years ended December 31, 2018 and 2017 our potential dilutive shares relating to stock options shares, 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 years ended December 31, 2018 and 2017:

 

      December 31  
      2018       2017  
                                 
      Class A       Series F       Class A       Series F  
      Common (1)       Preferred (2)       Common (1)       Preferred (2)  
Numerator                                
Net loss   $ (3,510,011 )   $ (3,510,011 )   $ (2,717,654 )   $ (2,717,654 )
Preferred stock dividends     (5,034,702 )     (5,034,702 )     (1,469,881 )     (1,469,881 )
Attributable Loss     (8,544,713 )     (8,544,713 )     (4,187,535 )     (4,187,535 )
                                 
Net loss allocated to Class A common           1,145,599             135,442  
Net loss allocated to Series F preferred shares     7,399,114             4,052,093        
Net loss allocated to Preferred shares (3)                        
                                 
Net loss attributable to each class of common Denominator   $ (1,145,599 )   $ (7,399,114 )   $ (135,442 )   $ (4,052,093 )
                                 
Weighted average basic shares outstanding     18,226,805       117,722,097       3,934,876       117,722,097  
Potential diluted shares                        
Weighted average diluted shares outstanding     18,226,805      

117,722 097

      3,934,876       117,722,097  
                                 
Net loss per share                                
Basic   $ (0.06 )   $ (0.06 )   $ (0.03 )   $ (0.03 )
Diluted   $ (0.06 )   $ (0.06 )   $ (0.03 )   $ (0.03 )

 

(1) Class A common stock includes series 1 and series 2 common shares

(2) Participating stock includes series F preferred shares with common shares

(3) Series A, Series B, Series C of preferred shares were not contractually obligated to participate in losses.

 

 

 

  F-41  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Preferred stock dividends consist of the following:

 

    December 31,  
    2018     2017  
Series B and Series C accumulating preferred stock dividends     1,614,050       1,277,249  
Deemed dividend for Series B preferred shares issued to Clip Digital shareholders           192,632  
Deemed dividend to Series A preferred stockholders for conversion of Series A into Series C preferred stock     3,228,200        
Deemed dividend for warrants issued to non-participating preferred stockholders     192,452        
      5,034,702       1,469,881  

 

The following potentially dilutive weighted average shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

    December 31,  
    2018     2017  
Stock Option Shares     27,917,380       26,404,656  
Convertible Series 1 Common Warrants     17,011,827       6,846,853  
Convertible Voting Preferred Shares, Series A, B, and C     54,444,099       23,049,900  
      99,373,306       56,301,409  

 

Note 10- Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO (Unaudited)

 

Pro forma net income per share as of the period December 31, 2018 upon completion of a qualifying IPO is computed as follows (in millions, except share amounts which are reflected in thousands, and per share amounts):

 

    Year Ended  
    December 31,  
    2018  
Numerator:        
Pro forma net loss attributable to common shares - basic   $ (3,510,011 )
Pro forma net loss attributable to common shares - diluted   $ (3,510,011 )
         
Denominator:        
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic(1)     179,191  
Pro forma adjustment to reflect automatic conversion of all convertible preferred shares to common stock     2,747,228  
Pro forma adjustment to reflect convertible notes to common stock     1,556,419  
Pro forma adjustment to reflect shares issued to a stockholder for repayment of $4M of bank debt     800,000  
Pro forma adjustment to reflect conversion of related party notes payable and accrued fees to related party     1,452,062  
Weighted-average shares used to compute pro forma per share - basic     6,734,900  
Pro forma net loss per share attributable to common shares - basic   $ (0.52 )
         
Weighted-average share used to compute pro forma net loss per share – dilutive     6,734,900  
Pro forma net loss per share attributable to common shares – diluted   $ (0.52 )

_______________________

(1)      The weighted-average shares were recomputed for the reverse stock split using the ratio of 101.717107.

  

 

 

  F-42  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Note 11 - Subsequent Events

 

The Company has evaluated all subsequent events through the date of the independent registered public accounting firm's report, which is the date the financial statements were available for issuance and concluded there were no material subsequent events requiring disclosure except those described below.

 

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 agreement with a shareholder for the collateral arrangement described in Note 6 – Related Party Transactions was converted into a long-term note totaling $725,000 due upon maturity on March 31, 2020. The collateral agreement was extended under similar terms.

 

In 2019, an additional 127,045 shares of Series B were issued at $1.0435 per share or $132,571 to four shareholders in connection with an extension of the 2018 pay to play financing. 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 12,008,057 Series C shares being issued at $0.115 per share in exchange for 1,050,000 Series A shares, 146,450 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.

 

During 2019, the Company entered into notes payable agreements with Mr. Thramann for $80,000, and two unrelated parties for $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 the 2020 Notes, described above. One other existing investor, who was owed $7,197 for services by the company, also agreed to convert his payable into the 2020 Notes, described above.

 

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 was paid in January 2020.

 

In November 2019, the Company sold $477,010 of Series 1 common shares to existing investors (the “Series 1 Investors”). In December 2019, after receiving the unanimous consent of the Series 1 Investors, the Company converted the common shares into additional 2020 Notes.

 

In November 2019, an investor defaulted on 25% or $23,414 of his Equity Note Receivable issued in connection with a financing round completed earlier in 2019. A total of 1,917,992 Series C Preferred shares were cancelled which were previously issued at a conversion rate of 9.07:1.00 for the series A and B preferred shares effectively reversing 25% of the earlier transaction. As a result, the exchange transaction was rescinded resulting in 187,500 shares of Series A Preferred being re-issued at $1.00 per share and 23,896 shares of Series B Preferred shares were re-issued at $1.0435 per share in connection with the default. An additional 203,580 Series C Preferred shares at $0.115/share were also forfeited. The defaulting shareholder was reissued 422,792 shares of Series 1 Common Stock Warrants previously issued for giving consent to the pay to play dilution as a non-participant as a result of subsequently defaulting on his participation. The investor also forfeited 28,934 Series 1 Common Warrants.

 

 

 

 

 

 

 

 

  F-43  

 

 

 

1,200,000 shares

of Common Stock

 

AUDDIA, INC.

 

 

 

 

 

 

PROSPECTUS

 

 

 

 

 

 

 

 

 

 

January     , 2020

 

     

 

 

 

Table of Contents

 

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

 

1,800,000 shares

 

of Common Stock

 

AUDDIA, INC.

 

 

This prospectus relates to the offer for sale of shares of common stock, par value $0.001 per share, by the existing holders of the securities named in this prospectus, referred to as selling stockholders throughout this prospectus. We will not receive any of the proceeds from the sale of common shares by the selling stockholders named in this prospectus.

 

The distribution of securities offered hereby may be effected in one or more transactions that may take place on The Nasdaq Capital Market, including ordinary brokers’ transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders. No sales of the shares covered by this prospectus shall occur until the shares of common stock sold in our initial public offering begin trading on The Nasdaq Capital Market. Currently, there is no public market for our common stock.

 

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

 

The selling stockholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation. We have agreed to indemnify the selling stockholders against certain liabilities, including liabilities under the Securities Act of 1933, as amended.

 

On            , 2020, a registration statement under the Securities Act of 1933, as amended, with respect to our initial public offering underwritten by Network 1 Financial Securities, Inc., as the managing underwriter, of $6.0 million of our common stock (or 1,200,000 shares of common stock assuming a $5.00 per share initial public offering price) (the “IPO”) was declared effective by the Securities and Exchange Commission. We received approximately $___ million in net proceeds from the offering (assuming no exercise of the underwriters’ over-allotment option) after payment of underwriting discounts and commissions and estimated expenses of the offering.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page__ of this prospectus for a discussion of information that should be considered in connection with an investment in our common stock.

 

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is            , 2019.

 


 

 

 

 

     

 

 

 

 

 

We have not 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. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The Selling Shareholders 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

 

Prospectus Summary 1
Information Regarding Forward Looking Statements 8
Risk Factors 10
Use of Proceeds 25
Dividend Policy 25
Corporate Conversion 25
Cash and Capitalization 27
Management Discussion and Analysis of Financial Condition and Results of Operations 28
Business 36
Management 42
Compensation of our Executive Officers and Directors 49
Certain Relationships and Related Persons Transactions 55
Principal Stockholders 57
Description of Capital Stock 58
Shares Eligible for Future Sale 62
Selling Stockholders 65
Plan of Distribution 66
Legal Matters 69
Experts 69
Where you can find more Information 69
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  
 

 

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 Clip Interactive, 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,” “Clip,” “the Company,” “we,” “us” and “our” refer, prior to the Corporate Conversion discussed herein, to Clip Interactive, LLC, and after the Corporate Conversion, to Clip Interactive, 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.).

 

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.

 

 

 

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Products and Technology

  

The Company develops technology and products that it expects 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.

 

 

 

 

 

 

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  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 will allow 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 will 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 7 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 our sale 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;

 

 

 

 

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  · 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.

 

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 (the “Jobs Act”). 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.

 

 

 

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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) 219-9771. 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 (“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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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.

 

 

 

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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;
     
  · maintain, expand, protect and enforce our intellectual property portfolio.

 

To become and remain profitable, we must develop and eventually commercialize one or more product candidates 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 the 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 the IPO, we expect to incur additional costs associated with operating as a public company. While we believe that the net proceeds from the 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.

 

 

 

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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 products.

 

Our ability to generate revenue from product sales and achieve profitability depends on our ability to successfully complete the development and commercialization of future 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.

 

 

 

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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 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 Securities and Exchange Commission, or 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.

 

 

 

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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 the 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.

 

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 relies 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, 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.

 

 

 

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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.

 

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, also will be critical to our success. As a result, 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.

 

 

 

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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.

 

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.

 

 

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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.

 

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.

 

 

 

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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.

 

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.

 

 

 

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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.

 

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.

 

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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.

 

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.

 

 

 

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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 Offering and ownership of our common stock

 

After this Offering, 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 the 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 the IPO, we will have outstanding 8,769,853 shares of common stock. This includes the shares that we are selling in the 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 588,281 common shares reserved for issuance upon the exercise of common share purchase options and 641,866 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” section of this prospectus.

 

 

 

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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 Offering.

 

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 Offering, 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 Offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this Offering 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,” or 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 the 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 Securities & Exchange Commission. 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 provide 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” disclosure 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.

 

 

 

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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:

 

  · 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 Delaware General Corporation Law, or 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.

 

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.

 

 

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USE OF PROCEEDS

 

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.

 

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 Clip Interactive, 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 6,769,853 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. Thramann, in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

Outstanding LLC Membership Units:     813,736,854  
         

Common Stock Shares After Conversion:

    6,769,853  
         

Shares of restricted common stock to be issued for:

       
         
Series A Preferred shares     20,768  
Series B Preferred shares     21,568  
Series C Preferred   shares     1,494,282  
Series F Preferred shares     1,210,610  
Conversion of Convertible Notes     3,008,481  
Series 1 & 2 Common Shares     1,014,144  
         
Common shares reserved for option and warrant exercise        
Options     588,281  
Warrants     641,866  
         
Total     8,000,000  

 

  

 

 

  Resale-25  
 

 

In connection with the Corporate Conversion, Clip Interactive, 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. Clip Interactive, 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 3 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 Offering 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, $0.001 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     806,161       (806,161 )      
Bank Debt     6,000,000       (4,000,000 )     2,000,000  
Notes payable to related parties     1,055,000       (1,055,000 )        
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       (2,328,398 )     10,000  
  Subscriptions Receivable     (184,656 )     184,656        
Additional Paid in Capital     4,751,541       46,582,068       51,333,609  
Accumulated members’ deficit     (47,215,177 )           (47,215,177 )
Total members’ equity (deficit)   $ (7,595,229 )           $ 4,128,432  

 

(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.

 

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:

 

Common Stock Shares After Conversion:

    6,769,853  
         

Shares of restricted common stock to be issued for:

       
Series A Preferred shares     20,768  
Series B Preferred shares     21,568  
Series C Preferred   shares     1,494,282  
Series F Preferred shares     1,210,610  
Conversion of Convertible Notes     3,008,481  
Series 1 & 2 Common Shares     1,014,144  
Common shares reserved for option and warrant exercise        
Options     588,281  
Warrants     641,866  
Total     8,000,000  

 

 

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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 Clip Interactive, 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 Offering 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 was largely attributed to (i) the loss of two major customers for our current platform in mid 2018, resulting in total Platform fees declining to $560,178 from $715,995 in 2018 vs. 2017, respectively, and (ii) a corresponding decrease in advertising revenue, which totaled $867,341 in 2018, compared to $1,220,444 in 2017, a decline of $353,104.

 

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 in mid 2018, such that Platform fees decreased to $175,782 in 2019 from $478,903 in the nine months ended September 30, 2018 and (ii) a corresponding decrease in advertising revenue from the loss of the two customers, which caused advertising revenue to decline to $183,958 in the nine month period ended September 30, 2019 vs $711,182 in the corresponding period in 2018. In the future, the company will continue to operate its legacy business and we do not expect to experience similar decreases in either Platform or Advertising revenues.

 

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 two major 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.

 

 

 

 

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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.

 

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 the Conversion, 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.

 

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.

 

 

 

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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 in no cumulative effect adjustment to the opening balance of accumulative deficit at date of adoption. The adoption of this ASU primarily impacted 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. 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 American Institute of CPA’s Practice Aid. Once a public trading market for our common stock has been established 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.

 

 

 

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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 of Series B Preferred and subsequently converted into 3,217,065 shares of Series C preferred shares at $0.115 per share in connection with the Series C stock exchange.

 

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 the IPO along with the repayment of $ 4 million of indebtedness by a stockholder upon the date of this prospectus,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 the IPO, we expect to incur additional costs associated with operating as a public company. While we believe that the net proceeds from the 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.

 

 

 

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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.

 

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.

 

 

 

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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.

 

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 December 31, 2018 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 apply 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 for public entities. Accordingly, our financial statements may not be comparable to other public companies that do not elect 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 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.

 

 

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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.

 

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 company maintains a large radio broadcasting company as its only major customer on its legacy platform. This customer generates approximately 70% of ongoing revenue. Our agreement with this major customer extends to March 2021 with an auto-renewal term. This customer is expected to continue to generate revenue for the company through at least the period of the current agreement. While our existing 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, and Executive Chairman 2012
Michael Lawless   56   Chief Executive Officer 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 and Booth have been appointed as directors commencing as of the date of this Prospectus

 

Executive officers

 

Jeff Thramann, Chairman of the Board and Executive Chairman: Dr. Thramann founded Clip Interactive 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, working with the CEO and CFO on the financial plans of the Company, and assisting the CEO in recruitment and hiring of senior executives 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 United States Military Academy in West Point, NY.

 

 

 

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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. Trada commenced its business with six employees, which grew to 85 employees in three years. 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.

 

Peter Shoebridge, Chief Technology Officer: Mr. Shoebridge has over 35 years of professional experience in the software development industry and 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 MBA 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.

 

 

 

 

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James Booth Director: Mr. Booth is the Chief Operating Officer of Sphero which develop physical robotic toys and 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 stops 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 during pivotal growth years for the company. At FedEx, Jim developed global logistics programs for small startups to large public multinational companies. Mr. Booth is an active mentor to companies in Techstars, Patriot Bootcamp as well as other startups. He is a 1990 graduate of the US Military Academy in West Point, N.Y.and served in combat operations in the Middle East as an Army Officer.

 

Composition of the board of directors

 

Our board currently consists 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.

 

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, or 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 Thraimann 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.

 

 

 

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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 Stephen Deitsch and James Booth with Stephen 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 Mr. Deitsch’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.

 

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;

 

 

 

 

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  · 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.

 

Compensation committee

 

Our compensation committee consists of Stephen 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 Stephen Deitsch, James Booth and _______ 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;

 

 

 

 

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  · 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.

 

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, Steven 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;

 

 

 

 

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  · 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

 

Upon the Conversion, 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.clipinteractive.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, Chairman of the Board and 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 and Executive Chairman   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 - Chief Executive Officer   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 - Chief Technology Officer   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.

 

 

 

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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.

 

Outstanding Equity Awards at June 30, 2019

 

The following table sets forth information regarding equity awards held by our Named Executive Officers as of June 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 Plan

 

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 Offering. 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. All of our current employees, consultants and other service providers are eligible to be granted. 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 the IPO, our board of managers has adopted the Auddia Inc. 2019 Equity Incentive Plan, or 2019 Plan. Our unitholders have approved the 2019 Plan contingent upon the consummation of the 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.

 

 

 

 

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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 2012 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.

 

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 or consultant 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.

 

 

 

 

 

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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, (*“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.

 

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.

 

 

 

 

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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.

 

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

 

We currently do not have non-employee directors.

 

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. at the rate of              .

 

 

 

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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 December 31, 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 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 has personally guaranteed the full amount of the loan. The outstanding balance on the line-of-credit at December 31, 2018 and 2017 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 $2,000,0000 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 a 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 was paid in January 30, 2020.

 

During 2019, the Company entered into new notes payable with Jeffrey Thramann for $80,000, The $80,000 note was repaid to Mr. Thramann in January 2020.

 

 

 

 

 

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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 Clip Interactive, 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.

 

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 Offering we have not had a formal policy regarding approval of transactions with related persons. In connection with this Offering, 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 Clip Interactive, LLC 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 June 30,, 2019. Each holder’s percentage ownership is based on 8,000,000 shares of fully diluted common stock outstanding as of September 30, 2019, after giving effect to the Corporate Conversion. Each holder’s percentage ownership after this Offering is based on shares of common stock outstanding.

 

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)

 
5% Stockholders:                  
Jeffrey Thramann (1)     1,441,573       21.3%       25.6% (4)
Richard Minicozzi     1,570,020       23.2%       17.9%  
                         
Executive Officers and Directors:                        
Michael Lawless (2)     251,656       3.7%       2.9%  
Peter Shoebridge (3)     75,068       1.0%       >1%  
Richard Liebman           %       %  
Stephen Deitsch           %       %  
James Booth           %       %  
              %       %  
All directors and executive officers as a group (6 persons)     1,768,297       26.1%       29.3%  

 

(1) Includes 230,963 shares that may be received upon the exercise of warrants
(2) Includes 219,800 of shares that may be received upon the exercise of stock options
(3) Includes 75,068 of shares that may be received upon the exercise of stock 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 100,000,000 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 6,769,853 shares of our common stock outstanding (including 6,769,853 shares of restricted common stock) and approximately 109 stockholders of record. No shares of our preferred stock are designated, issued or outstanding.

 

Upon completion of this offering, we will have 641,866 outstanding warrants as follows:

 

No. of Warrants Exercise Price
267,832 $           0.112092
4,481 $           1.017171
311,079 $           1.569495
51,737 $           2.339493
4,157 $           2.471726
2,581 $         14.240395

   

All of these warrants will expire in October 2023. NOTE TO DRAFT-ARE THESE SUBJECT TO LOCK-UP?

 

The warrants have a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of the underlying shares at the time of exercise of the warrant after deduction of a number of shares equal in value to the aggregate exercise price. The warrants contain provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations.

 

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.

 

 

 

 

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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.

 

Fully paid and nonassessable

 

All of our outstanding shares of common stock are, and the shares of common stock are 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. As of the date of this Prospectus, there are no shares of preferred stock 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.

 

 

 

 

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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.

 

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, or 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.
     

 

 

 

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  · 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. Our certificate of incorporation also provides that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. 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. However, there is uncertainty as to whether a court would enforce these provisions and that investors cannot waive compliance with the federal securities laws and rules and regulations thereunder.

 

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 Offering 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 Offering. Future sales of our common stock in the public market after this Offering, 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 Offering 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 Global Market under the symbol “CLIP,” 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 8,769,853 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 sold in the IPO, and 1,800,000 shares of common stock being registered for sale pursuant to this 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 qualify 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 lock-up
         
90 Days after Date of Prospectus   0   Shares saleable under Rules 144 and 701 that are not subject to a lock-up
         
180 Days after Date of Prospectus  

4,969,853

  Lock-up released; shares 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 Offering (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.

 

 

 

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Equity incentive plans

 

Our board of directors and stockholders previously adopted the Existing Plan. 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.”

 

Lock-up agreements

 

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.

 

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.

 

 

 

 

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SELLING STOCKHOLDERS

 

An aggregate of 1,800,000 shares of our common stock are currently being offered under this prospectus by certain stockholders who were investors in private placement financings between 2012 and 2019.

 

The following table sets forth certain information with respect to each selling stockholder for whom we are registering shares for resale to the public. The selling stockholders have not had a material relationship with us within the past three years other than as described in the footnotes to the table below or as a result of their acquisition of our shares or other securities. To our knowledge, subject to community property laws where applicable, each person named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name. None of the selling stockholders are broker-dealers or affiliates of broker-dealers, unless otherwise noted.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. The percentage of shares beneficially owned after the offering is based on ________ shares of common stock to be outstanding after this offering, including 1,200,000 shares of common stock sold in our initial public offering and shares issued pursuant to the conversion.

 

Name   Total Number of shares owned prior to this Offering     Number of Shares being Offered     Percentage of shares owned prior to this Offering     Percentage of shares owned after the Offering assuming all of the shares are sold  
Alan Villavicencio     64,651       64,651       1.0%       0.0%  
Tiziano Sartori     14,236       14,236       0.2%       0.0%  
Glenn L. Kieper Jr. (1)     129,799       129,799       1.9%       0.0%  
Alexander Martello III (2)     53,452       53,452       0.8%       0.0%  
Carmine Solimine     14,021       14,021       0.2%       0.0%  
Peter & Mary Beth Caddigan     38,481       38,481       0.6%       0.0%  
Michael Mahoney     17,323       17,323       0.3%       0.0%  
William L. Daly     34,643       34,643       0.5%       0.0%  
Seth M. Zeidman     188,552       188,552       2.8%       0.0%  
Aram Neuschatz     17,089       17,089       0.3%       0.0%  
Stephen Napoli     13,917       13,917       0.2%       0.0%  
Marc G. Preininger     146,591       146,591       2.2%       0.0%  
Thomas M. Napoli (3)     90,835       90,835       1.3%       0.0%  
Andrew C. Smith     13,691       13,691       0.2%       0.0%  
Richard F. Ball     132,501       132,501       2.0%       0.0%  
Gary D. Bartholomew III (4)     13,162       13,162       0.2%       0.0%  
Mark S. Carelli     17,920       17,920       0.3%       0.0%  
Karahalios Investment, LLC (5)     22,570       22,570       0.3%       0.0%  
John M. Magness     23,644       23,644       0.3%       0.0%  
Richard E. Scott     33,487       33,487       0.5%       0.0%  
ESU Investments LLC (6)     369,321       342,492       5.1%       0.3%  
John F. Triscoli     66,223       66,223       1.0%       0.0%  
Paul Martello     81,501       81,501       1.2%       0.0%  
John W. Noble Jr.     229,219       229,219       3.4%       0.0%  
Totals     1,826,829       1,800,000       26.6%       0.3%  

__________________________ 

1. Includes 14,504 shares held by Millennium Trust Co LLC f/b/o Glenn L Kieper, Jr. Mr. Kieper has full investment authority over the shares held by Millennium Trust Co LLC.

 

2, Includes 32,577 shares held by Millennium Trust Co LLC f/b/o Alexander Martello III. Mr. Martello has full investment authority over the shares held by Millennium Trust Co LLC.

 

(3). Includes 77,754 shares held by Millennium Trust Co LLC f/b/o Thomas Michael Napoli III. Mr. Napoli has full investment authority over the shares held by Millennium Trust Co LLC.

 

(4) Includes 6,995 shares held by Millennium Trust Co LLC f/b/o Gary D. Bartholomew III. Mr. Bartholomew has full investment authority over the shares held by Millennium Trust Co LLC.

 

(5) Dean Karahalios has full investment authority over these shares.

 

(6) John Scarano has full investment authority over these shares.

 

 

 

 

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PLAN OF DISTRIBUTION

 

Plan of Distribution for Selling Shareholders

 

The selling shareholders may sell some or all of their shares at a price of $5.00 per share, and thereafter at prevailing market prices or privately negotiated prices. The Selling Shareholders’ Shares may be sold or distributed from time to time by the selling shareholders, directly to one or more purchasers or through brokers or dealers who act solely as agents, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices, which may be changed. The distribution of the shares may be effected in one or more of the following methods:

 

  · ordinary brokers transactions, which may include long or short sales;
     
  · transactions involving cross or block trades on any securities market where our common stock is trading;
     
  · through direct sales to purchasers or sales effected through agents;
     
  · privately negotiated transactions;
     
  · any combination of the foregoing; or
     
  · any other method permitted by law

 

In addition, the selling shareholders may enter into hedging transactions with broker-dealers who may engage in short sales, if short sales were permitted, of shares in the course of hedging the positions they assume with the selling shareholders. The selling shareholders may also enter into option or other transactions with broker-dealers that require the delivery by such broker-dealers of the shares, which shares may be resold thereafter pursuant to this prospectus. None of the selling shareholders are broker-dealers or affiliates of broker dealers.

 

Each selling shareholder has informed us that it is not a registered broker-dealer and does not have any written or oral agreement or understanding, directly or indirectly, with any person to engage in a distribution of the common stock. Upon us being notified in writing by a selling shareholder that any material arrangement has been entered into with a broker-dealer for the distribution of common stock, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being distributed and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.

 

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

 

Each selling shareholder may sell all, some or none of the Selling Shareholders’ Shares registered pursuant to the registration statement of which this prospectus forms a part. If sold under the registration statement of which this prospectus forms a part, the shares of common stock registered hereunder will be freely tradable in the hands of persons other than our affiliates that acquire such shares.

 

The selling shareholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling shareholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

 

 

 

  Resale-66  
 

 

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 offering.

 

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 of the IPO 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,

 

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 , of the IPO 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 offering; (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 offering; 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 of the IPO containing similar restrictions.

 

 

 

  Resale-67  
 

 

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 offering and common stock issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing prior to the primary offering 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 offering, (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 offering, (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.

 

In order to facilitate the offering of the common stock, the underwriters of the IPO may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters of the IPO 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 of the IPO under the over-allotment option. The underwriters of the IPO 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 of the IPO will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters of the IPO may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters of the IPO 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 of the IPO 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 offering. As an additional means of facilitating this offering, the underwriters of the IPO 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 of the IPO are not required to engage in these activities and may end any of these activities at any time.

 

We and the underwriters of the IPO 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 of the IPO, if any, participating in this offering and the underwriters participating in this offering may distribute prospectuses electronically. The underwriters of the IPO 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 of the IPO , and should not be relied upon by investors.

 

 

 

 

  Resale-68  
 

 

LEGAL MATTERS

 

Bingham & Associates Law Group, APC will pass upon the validity of the shares of common stock offered hereby for us.

 

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 offering, 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.clipinteractive.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.

 

 

 

 

 

 

 

 

 

 

  Resale-69  
 

 

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-5  
Notes to Condensed Financial Statements for the nine months ended September 30, 2019 (Unaudited)     F-7  
         
         
Financial Statements for the year ended December 31, 2018        
Report of Independent Registered Public Accounting Firm     F-23  
Balance Sheets     F-24  
Statements of Operations     F-25  
Statement of Changes in Members' Deficit     F-26  
Statements of Cash Flows     F-27  
Notes to Financial Statements     F-28  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  F-1  

 

   

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Condensed Balance Sheets

  

    September 30,     Pro Forma September 30,  
    2018     2019     2019 (Note 1)  
                   
Assets                  
Current assets                        
Cash   $ 446,186     $ 85,083     $ 85,083  
Accounts receivable, net     86,913       21,855       21,855  
Total current assets     533,099       106,938       106,938  
                         
Non-current assets                        
Capitalized software, net     1,185,531       1,601,818       1,601,818  
Property and equipment, net     10,977       1,457       1,457  
Security deposits     20,614       7,594       7,594  
Total non-current assets     1,217,122       1,610,869       1,610,869  
Total assets   $ 1,750,221     $ 1,717,807     $ 1,717,807  
                         
Liabilities and Members' Deficit                        
Current liabilities                        
Accounts payable and accrued liabilities   $ 666,896     $ 989,375     $ 989,375  
Line-of-credit     6,000,000       6,000,000       2,000,000  
Subscription escrow payable     500,000              
Convertible notes payable           462,500        
Notes payable to related parties           1,055,000        
Accrued fees to a related party     742,605       806,161        
Total current liabilities     7,909,591       9,313,036       2,989,375  
                         
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 - Series 1 and 2     71,967       2,338,398        
Common stock, $0.001 par value, 8,800,000 shares outstanding pro forma                 8,800  
Additional paid-in capital     1,373,833       4,751,541       45,934,809  
Accumulated deficit     (37,242,871 )     (47,215,177 )     (47,215,177 )
Subscription receivable           (184,656 )      
Total members' deficit     (6,159,280 )     (7,595,229 )     (1,271,568 )
Total liabilities and members' deficit   $ 1,750,221     $ 1,717,807     $ 1,717,807  

 

 

 

See notes to financial statements.

 

 

  F-2  

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Condensed Statements of Operations

 

   

For the Nine Months Ended

September 30,

 
    2018     2019  
             
Revenue   $ 1,225,086     $ 382,233  
Operating expenses:                
Direct cost of services     1,378,512       747,510  
Sales and marketing     168,294       111,947  
Research and development     240,284       175,757  
General and administrative     1,200,093       1,527,966  
Total operating expenses     2,987,183       2,563,180  
                 
Loss from operations     (1,762,097 )     (2,180,947 )
                 
Other (expense) income                
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 )

 

 

Pro Forma weighted average common shares outstanding (Note 9)            
Basic – Class A Common Shares     4,388,024       95,384,986  
Basic – Series F Preferred Shares     117,722,097       83,076,484  
Diluted – Class A Common Shares     4,388,024       95,384,986  
Diluted – Series F Preferred Shares     117,722,097       83,076,484  
                 
Pro Forma Net loss per share attributable to common shares                
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 )
                 
Weighted-average common shares used to compute pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Notes 10):                
Basic             7,493,457  
Diluted             7,493,457  
                 
Pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Note 10):                
Basic           $ (0.42 )
Diluted           $ (0.42 )

 

 

 

 

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  
             
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  
Changes in assets and liabilities                
Accounts receivable     173,409       73,045  
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 )
Net cash used in investing activities     (607,010 )     (578,070 )
                 
Cash flows from financing activities                
Proceeds from issuance of preferred shares, net of issuance costs     2,076,610       108,779  
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  
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  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 323,250     $ 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   $ 370,000     $  
Series B preferred shares issued for foregone compensation   $ 137,515     $  
Common stock shares issued for severance compensation   $ 11,250     $  

 

See notes to financial statements.

 

 

  F-4  

 

 

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-5  

 

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-6  

 

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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.

 

Pro Forma Balance Sheet Information

 

The pro forma balance sheet information as of September 30, 2019 presents the Company’s members’ deficit as though all of the Company’s redeemable convertible Series A, B, C and F preferred shares outstanding, Series 1 and 2 common shares, convertible notes payables, related party notes payable and accrued fees to a related party, stock options and warrants had automatically converted into an aggregate of 8,000,000 shares of the Company’s common stock, upon a corporate conversion and the completion of a qualifying initial public offering (“IPO”) of the Company’s common stock. Additionally, the pro forma balance sheet gives effect to the issuance of 800,000 shares of common stock for the repayment of $4,000,000 of the Company’s bank debt by a stockholder in connection with the corporate conversion. The shares of common stock issuable and the proceeds expected to be received by the Company upon the completion of a qualifying IPO are excluded from such pro forma financial information.

 

The pro forma balance sheet information as of September 30, 2019 has been prepared to give effect to:

 

· the Conversion of the Convertible Notes into 1,556,419 shares of common stock;
· the Conversion of A Preferred shares into 20,768 shares of common stock;
· the Conversion of B Preferred shares into 21,568 shares of common stock;
· the Conversion of C Preferred shares into 1,494,282 shares of common stock;
· the Conversion of F Preferred shares into 1,210,610 shares of common stock;
· the Conversion of Series 1 and 2 Common shares into 1,014,144 shares of common stock;
· the Issuance of 800,000 shares of common stock for the repayment of $4 million of bank debt by a stockholder;
· the Conversion of related party notes payable and accrued fees to a related party into 1,452,062 shares of common stock.

 

 

  F-7  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO

 

Pro forma basic net loss per share attributable to common stockholders is computed to give effect to (i) the automatic conversion of all redeemable convertible Series A, B, C and F preferred shares outstanding, Series 1 and 2 common shares, convertible notes payables, related party notes payable and accrued fees to a related party ,stock options and warrants had automatically converted into an aggregate of 8,000,000 shares of common stock and (ii) the issuance of 800,000 shares of common stock for the repayment of $4,000,000 of bank debt by a stockholder. For purpose of the pro forma net loss per share calculation the weighted-average shares used in the computation of net loss per share attributable to common stockholders were adjusted for the reserve stock split in connection with the corporate conversion using the ratio of 101.717107 as described in Note 10.

 

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.

 

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, 2018, and 2019, the allowance for doubtful accounts was $15,000 and $2,500, respectively.

 

 

  F-8  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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 23.3% and 64.8% of accounts receivable at September 30, 2018 and 2019, respectively. Two and three customers accounted for approximately 72.2% percent and 83.2% percent of revenues as of and for the period ended September 30, 2018 and 2019, 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.

 

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 $607,010 and $578,070 were capitalized for the nine months ended September 30, 2018 and 2019. Amortization of capitalized software development costs were $188,507 and $295,856 for the nine months ended September 30, 2018 and 2019, 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.

 

 

 

 

  F-9  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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, 2018 and 2019 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.

 

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.

 

 

 

 

  F-10  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

Geographic Locations & Segments

 

For the nine months ended September 30, 2018 and 2019, 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 an 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.

 

Liquidity and Capital Resources

 

In the nine months ended September 30, 2019, the Company generated negative cash flow from operations of ($1,406,242) 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.

 

 

 

 

  F-11  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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 $1,342,187, of funds as described in Subsequent Events (Note 11) 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

 

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.

 

 

 

 

  F-13  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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.

 

The following table presents revenues disaggregated by revenue source:

 

    Nine months Ended September 30,  
    2018     2019  
Revenues                
Development Service Fees (app and web design, development)   $     $ 15,290  
Platform Service Fees (hosting services, support, data analytics)     492,988       179,303  
Digital advertising served by 3rd parties     421,630       172,697  
Digital advertising served by Clip Interactive     310,468       14,943  
    $ 1,225,086     $ 382,233  

 

Note 3 – Balance Sheet Disclosures

 

Accounts payable and accrued liabilities consist of the following:

 

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

 

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% (5.25% at September 30, 2018 and 5.0% 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 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, 2018 and 2019 was $6,000,000.

 

 

 

  F-14  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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 $422,549 and $605,621 being recorded as interest expense for the nine months ended September 30, 2018 and 2019 respectively. The balance outstanding on the collateral at September 30, 2018 and 2019 was $17,605 and $806,161, 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.

 

 

 

  F-15  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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, 2018 and 2019 was $114,150 and $117,178 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.

 

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.

 

 

  F-16  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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.

 

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  

 

 

 

  F-17  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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%

 

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.

 

 

 

  F-18  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended 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.

 

For the nine months ended September 30, 2018 and 2019 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.

 

 

 

 

 

 

 

  F-19  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

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, 2018 and 2019:

 

    For the Nine Months Ended September 30,  
    2018     2019  
    Class A     Class B     Class A     Class B  
    Common (1)     Common (2)     Common (1)     Common (2)  
Numerator                                
                                 
Net loss   $ (2,561,871 )   $ (2,561,871 )   $ (3,133,817 )   $ (3,133,817 )
Preferred stock dividends     (1,170,273 )     (1,170,273 )     (2,025,920 )     (2,025,920 )
Attributable Loss     (3,732,144 )     (3,732,144 )     (5,159,737 )     (5,159,737 )
                                 
Net loss allocated to Class A common           134,115             2,757,802  
Net loss allocated to Class B common     3,598,029             2,401,935        
Net loss allocated to Preferred shares (3)                        
                                 
Net loss attributable to each class of common   $ (134,115 )   $ (3,598,029 )   $ (2,757,802 )   $ (2,401,935 )
                                 
Denominator                                
                                 
Weighted average basic shares outstanding     4,388,024       117,722,097       95,384,986       83,076,484  
Potential diluted shares                        
Weighted average diluted shares outstanding     4,438,024       117,722,097       95,384,986       83,076,484  
                                 
Net loss per share                                
Basic   $ (0.03 )   $ (0.03 )   $ (0.03 )   $ (0.03 )
Diluted   $ (0.03 )   $ (0.03 )   $ (0.03 )   $ (0.03 )

_______________________

(1) Class A common stock includes series 1 and series 2 common shares

(2) Class B common stock includes series F preferred shares as common shares

(3) Series A, Series B, Series C of preferred shares were not contractually obligated to participate in losses.

 

 

 

 

  F-20  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

Preferred stock dividends consist of the following:

    September 30,  
    2018     2019  
Series B accumulating preferred stock dividends   $ 1,170,273     $ 193,196  
Series C accumulating preferred stock dividends           1,194,203  
Deemed dividend to Series A preferred stockholders for conversion of Series A into Series C preferred stock           638,521  
    $ 1,170,273     $ 2,025,920  

 

The following potentially dilutive weighted average shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

    September 30,  
    2018     2019  
Stock Option Shares     34,650,667       27,570,475  
Convertible Series 1 Common Warrants     59,399,558       63,819,916  
Convertible Voting Preferred Shares – Series A, B, and C     24,097,615       199,831,838  
      118,147,840       291,222,229  

 

Note 10 – Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO

 

Pro forma net income per share as of the period September 30, 2019 upon completion of a qualifying IPO is computed as follows (in millions, except share amounts which are reflected in thousands, and per share amounts):

 

 

    Period Ended  
    September 30,  
    2019  
Numerator:        
Pro forma net loss attributable to common shares - basic   $ (3,133,817 )
Pro forma net loss attributable to common shares - diluted   $ (3,133,817 )
         
Denominator:        
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic(1)     937,748  
Pro forma adjustment to reflect automatic conversion of all convertible preferred shares to common stock     2,747,228  
Pro forma adjustment to reflect convertible notes to common stock     1,556,419  
Pro forma adjustment to reflect shares issued to a stockholder for repayment of $4M of bank debt     800,000  
Pro forma adjustment to reflect conversion of related party notes payable and accrued fees to related party     1,452,062  
Weighted-average shares used to compute pro forma per share - basic     7,493,457  
Pro forma net loss per share attributable to common shares - basic   $ (0.42 )
Weighted-average share used to compute pro forma net loss per share – dilutive     7,493,457  
Pro forma net loss per share attributable to common shares – diluted   $ (0.42 )

 

______________________

(1)      The weighted-average shares were recomputed for the reverse stock split using the ratio of 101.717107.

 

 

 

  F-21  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

 

Notes to Financial Statements

For the nine months ended September 30, 2019

 

Note 11 - Subsequent Events

 

The Company has evaluated all subsequent events through January 27, 2020, which is the date the financial statements were available for issuance and, , concluded there were no material subsequent events requiring disclosure except those described below.

 

In July 2019, the Company initiated a financing in the amount of $2.0 million in the form of a 6% Convertible Promissory Notes that were originally due December 31, 2019. Subsequently, a majority of noteholders, voted to extend the due date from December 31, 2019 to March 31, 2020.

 

In October 2019 the Company obtained a $400,000 non interest short term loan from a related party. The Company was advanced $200,000 net of $12,000 in closing fees and the remainder $200,000 was put into an escrow account. On December 2019, the Company made a principal payment of $57,000. The remaining principal of $143,000 and the loan financing fees of $100,000, which total $243,000 as paid in January 2020.

 

Subsequent to September 30, 2019, the Company sold $75,000 of 6% Convertible Promissory Notes due March 31, 2020 to two new investors that convert mandatorily upon the date of the Company’s initial public offering (“IPO”) into common stock at a 50% discount to the IPO price. The Company also sold $865,068 of a new 6% Convertible Promissory Notes, due March 31, 2020, (“the 2020 Notes”) to existing investors with a mandatory conversion upon the date of the IPO into common shares at a 75% discount to the IPO price.

 

In November 2019, the Company sold $477,010 of Series 1 common shares to existing investors (the “Series 1 Investors”). In December 2019, after receiving the unanimous consent of the Series 1 Investors, the Company converted the common shares into the 2020 Notes described above.

 

Prior to September 30, 2019, the Company entered into notes payable agreement 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 the 2020 Notes, described above. Two other existing investors, who was owed $17,197 for services by the company, also agreed to convert his payable into the 2020 Notes, described above.

 

In November 2019, an investor defaulted on 25% or $23,414 of his Equity Note Receivable issued in connection with a financing round completed earlier in 2019. A total of 1,917,992 Series C Preferred shares were cancelled which were previously issued at a conversion rate of 9.07:1.00 for the series A and B preferred shares effectively reversing 25% of the earlier transaction. As a result the exchange transaction was rescinded resulting in 187,500 shares of Series A Preferred being re-issued at $1.00 per share and 23,896 shares of Series B Preferred shares were re-issued at $1.0435 per share in connection with the default. An additional 203,580 Series C Preferred shares at $0.115/share were also forfeited. The defaulting shareholder was reissued 422,792 shares of Series 1 Common Stock Warrants previously issued for giving consent to the pay to play dilution as a non-participant as a result of subsequently defaulting on his participation. The investor also forfeited 28,934 Series 1 Common Warrants.

  

 

 

 

 

 

  F-22  

 

 

 

 

Report of INDEPENDENT Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

Clip Interactive, LLC

Boulder, Colorado

 

opinion ON THE FINANCIAL STATEMENTS

 

We have audited the accompanying balance sheets of Clip Interactive, LLC (the "Company") as of December 31, 2018 and 2017, and the related statements of operations, changes in members’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

going concern uncertainty

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

BASIS FOR opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Plante & Moran PLLC

Plante & Moran PLLC

 

 

October 2, 2019

Denver, Colorado

 

We have served as the Company's auditor since 2015.

 

 

 

  F-23  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Balance Sheets

 

    December 31  
    2018     2017  
Assets            
Current assets            
Cash   $ 271,699     $ 46,053  
Accounts receivable, net     87,400       260,322  
Total current assets     359,099       306,375  
                 
Non-current assets                
Property and equipment, net of accumulated depreciation of $676,591 and $649,209     7,087       32,439  
Software development costs, net of accumulated amortization of $336,567 and $85,225     1,318,149       767,027  
Security deposits     20,614       20,614  
Total non-current assets     1,345,850       820,080  
                 
Total assets   $ 1,704,949     $ 1,126,455  
                 
Liabilities and Members' Deficit                
Current liabilities            
Accounts payable and accrued liabilities   $ 574,611     $ 625,002  
Line-of-credit     6,000,000       6,000,000  
Notes payable to a related party           330,000  
Total current liabilities     6,574,611       6,955,002  
                 
Long-term liabilities                
Accrued fees to a related party     875,540       500,877  
                 
Total liabilities     7,450,151       7,455,879  
                 
Commitments and contingencies                
                 
Members' deficit                
Series C preferred shares (liquidation preference of $35,510,665)     24,798,964        
Series B preferred shares (liquidation preference of $4,342,065)     2,836,688       17,639,079  
Series A preferred shares (liquidation preference of $2,975,000)     2,944,314       8,244,314  
Series F preferred shares            
Common shares     1,468,085       60,717  
Additional paid-in capital     4,611,868       1,237,193  
Accumulated deficit     (42,055,440 )     (33,510,727 )
Subscriptions receivable     (349,681 )      
Total members' deficit     (5,745,202 )     (6,329,424 )
                 
Total liabilities and members' deficit   $ 1,704,949     $ 1,126,455  

 

See notes to financial statements.

 

 

  F-24  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statements of Operations

 

 

    For the Years Ended  
    December 31,  
    2018     2017  
Revenue   $ 1,467,519     $ 1,988,204  
                 
Operating expenses                
Direct cost of services     1,697,211       1,882,571  
Sales and marketing     209,934       451,049  
Research and development     295,470       348,697  
General and administrative     1,567,703       942,807  
Total operating expenses     3,770,318       3,625,124  
                 
Loss from operations     (2,302,799 )     (1,636,920 )
                 
Other (expense) income                
Interest expense     (1,207,770 )     (1,080,734 )
Interest income     558        
Total other expense     (1,207,212 )     (1,080,734 )
                 
Net loss   $ (3,510,011 )   $ (2,717,654 )
                 
Pro Forma weighted average common shares outstanding (Note 9)                
Basic – Class A Common Shares     18,226,805       3,934,876  
Basic – Series F Preferred Shares     117,722,097       117,722,097  
Diluted – Class A Common Shares     18,226,805       3,934,876  
Diluted – Series F Preferred Shares     117,722,097       117,722,097  
                 
Pro Forma Earnings (loss) per share attributable to common shares (Note 9)                
Basic – Class A Common Shares   $ (0.06 )   $ (0.03 )
Basic – Series F Preferred Shares   $ (0.06 )   $ (0.03 )
Diluted – Class A Common Shares   $ (0.06 )   $ (0.03 )
Diluted – Series F Preferred Shares   $ (0.06 )   $ (0.03 )
                 
Unaudited Weighted-average common shares used to compute pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Note 10):                
Basic    

6,734,900

         
Diluted    

6,734,900

         
                 
Unaudited Pro forma net loss per share attributable to common stockholders for IPO capitalization changes (Note 10):                
Basic   $

(0.52

)        
Diluted   $

(0.52

)        

 

See notes to financial statements.

 

 

 

  F-25  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

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, 2016         $       9,476,659     $ 10,879,395       8,275,000     $ 8,244,314       117,722,097     $  
Series B preferred shares issued for conversion of debt and accrued interest of $190,097 less issuance costs of $46,372                 4,866,483       5,031,802                          
Series B preferred shares issued to Clip Digital stockholders                 184,602       192,632                          
Series B preferred shares issued for cash                 247,246       258,001                          
Common share warrants issued in connection with debt                                                
Accumulation of dividends on Series B preferred shares                       1,277,249                          
Common share warrants issued in connection with a security interest                                                
Share-based compensation expense                                                
Net loss                                                
Balance - December 31, 2017         $       14,774,990      $ 17,639,079       8,275,000     $ 8,244,314       117,722,097     $  

 

 

 

    Common     Accumulated     Subscriptions        
    Shares     Amount     APIC     Deficit     Receivable     Total  
Balance - December 31, 2016     3,934,876     $ 60,717     $ 1,053,303     $ (29,323,192 )   $     $ (9,085,463 )
Series B preferred shares issued for conversion of debt and accrued interest of $190,097 less issuance costs of $46,372                                   5,031,802  
Series B preferred shares issued to Clip Digital stockholders                       (192,632 )            
Series B preferred shares issued for cash                                   258,001  
Common share warrants issued in connection with debt                 105,311                   105,311  
Accumulation of dividends on Series B preferred shares                       (1,277,249 )            
Common share warrants issued in connection with a security interest                 43,283                   43,283  
Share-based compensation expense                 35,296                   35,296  
Net loss                       (2,717,654 )           (2,717,654 )
Balance - December 31, 2017     3,934,876     $ 60,717     $ 1,237,193     $ (33,510,727 )   $     $ (6,329,424 )

 

See notes to financial statements.

 

 

 

 

 

 

 

 

  F-26  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

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     $  
Issuance of Series B preferred shares net of offering costs of $40,319                 2,049,396       2,098,226                          
Series B preferred shares issued for a note receivable                 235,967       246,231                          
Series B preferred shares issued for a conversion of debt                 354,576       370,000                          
Series B preferred shares issued for foregone compensation                 131,782       137,515                          
Common shares issued for severance                                                
Accumulating dividends on Series B preferred shares           319,894             1,294,156                          
Accumulated dividends converted to Series C from Series B preferred shares           3,055,666             (3,055,666 )                        
Conversion of Series A and Series B preferred shares for Series C preferred shares     186,271,597       21,423,404       (15,230,334 )     (15,892,853 )     (5,300,000 )     (5,300,000 )            
Common shares issued for cash                                                
Common shares issued for conversion of accrued interest                                                
Common shares issued for notes receivable                                                
Common share warrants issued to non-participating Series A and Series B shareholders                                                
Common share warrants issued in connection with a security interest                                                
Share-based compensation expense                                                
Net loss                                                
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     $  

 

 

 

 

  F-27  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statement of Changes in Members’ Deficit (continued)

 

    Common     Accumulated     Subscriptions        
    Shares     Amount     APIC     Deficit     Receivable     Total  
Balance - December 31, 2017     3,934,876     $ 60,717     $ 1,237,193     $ (33,510,727 )   $     $ (6,329,424 )
Issuance of Series B preferred shares net of offering costs of $40,319                                   2,098,226  
Series B preferred shares issued for a note receivable                             (246,231 )      
Series B preferred shares issued for a conversion of debt                                   370,000  
Series B preferred shares issued for foregone compensation                                   137,515  
Common shares issued for severance     680,474       11,250                         11,250  
Accumulating dividends on Series B preferred shares                       (1,614,050 )            
Accumulated dividends converted to Series C from Series B preferred shares                                    
Conversion of Series A and Series B preferred shares for Series C preferred shares                 2,997,649       (3,228,200 )            
Common shares issued for cash     51,672,086       1,188,458                         1,188,458  
Common shares issued for conversion of accrued interest     4,530,861       104,210                         104,210  
Common shares issued for notes receivable     4,497,827       103,450                   (103,450 )      
Common share warrants issued to non-participating Series A and Series B shareholders                 192,452       (192,452 )            
Common share warrants issued in connection with a security interest                 43,355                   43,355  
Share-based compensation expense                 141,219                   141,219  
Net loss                       (3,510,011 )           (3,510,011 )
Balance - December 31, 2018     65,316,124     $ 1,468,085     $ 4,611,868     $ (42,055,440 )   $ (349,681 )   $ (5,745,202 )

 

See notes to financial statements.

 

 

 

 

  F-28  

 

CLIP INTERACTIVE, LLC (DBA AUDDIA)

Statements of Cash Flows

 

    For the Years Ended  
    December 31,  
    2018     2017  
Cash flows from operating activities:                
Net loss   $ (3,510,011 )   $ (2,717,654 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization     278,724       159,254  
Bad debt provision     (40,000 )     (50,500 )
Share-based compensation     141,219       35,296  
Interest expense on warrants issued     43,355       148,594  
Accrued interest converted into Series B preferred stock           173,052  
Series B issued for deferred wages     137,515        
Issuance of common stock for severance     11,250        
Changes in assets and liabilities                
Accounts receivable     212,922       (102,168 )
Accrued fees to a related party     374,663       500,877  
Accounts payable and accrued liabilities     53,817       (72,348 )
Net cash used in operating activities     (2,296,546 )     (1,925,597 )
                 
Cash flows from investing activities                
Software capitalization     (802,464 )     (852,252 )
Purchase of property and equipment     (2,029 )      
Net cash used in investing activities     (804,493 )     (852,252 )
                 
Cash flows from financing activities                
Proceeds from issuance of preferred shares     2,138,546       258,001  
Proceeds from conversion of notes payable           1,528,378  
Proceeds from issuance of common shares     1,188,458        
Proceeds from related-party debt     115,000       335,000  
Payments of related-party debt     (75,000 )     (5,000 )
Equity issuance costs on Series B preferred shares     (40,319 )     (46,372 )
Net cash provided by financing activities     3,326,685       2,070,007  
                 
Net increase (decrease) in cash     225,646       (707,842 )
Cash - beginning of year     46,053       753,895  
Cash - end of year   $ 271,699     $ 46,053  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 675,459     $ 255,796  
Supplemental disclosure of non-cash activity:                
Series B preferred shares issued for conversion of debt and accrued interest   $ 370,000     $ 5,031,802  
Series B preferred shares issued to Clip Digital shareholders   $     $ 192,632  
Accumulation of dividends on Series B and Series C preferred stock   $ 1,614,050     $ 1,277,249  
Series B preferred shares issued for a note receivable   $ 246,231     $  
Series B preferred shares issued for foregone compensation   $ 137,515     $  
Deemed dividend charged to accumulated deficit for conversion   $ 3,228,200     $  
Common shares issued for conversion of accrued interest   $ 104,210     $  
Common shares issued for notes receivable   $ 103,450     $  
Common shares issued for severance   $ 11,250     $  
Warrants issued to non-participating Series A and Series B shareholders   $ 192,452     $  
Series B warrants issued in connection with debt   $     $ 105,311  
Warrants issued in connection with a security interest   $ 43,355     $ 43,283  

 

See notes to financial statements.

 

 

 

  F-29  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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

 

Clip Interactive, LLC (the "Company" or "Clip") was formed January 14, 2012. Clip is a technology company that makes radio broadcasts and streaming audio content digitally actionable and measurable. By turning a traditional media channel that reaches 245 million people each week in the U.S. into a digital marketing channel, Clip increases the value of radio's core asset: the audio "spot" (radio ad).

 

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.

 

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.

 

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. As of the balance sheet date and periodically throughout the year, the balance of cash exceeded the federally insured limit.

 

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 December 31, 2018, and 2017, the allowance for doubtful accounts was $10,000 and $50,000, respectively.

 

 

 

  F-30  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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. Two and three major customers accounted for approximately 72 percent and 66 percent of accounts receivable at December 31, 2018 and 2017, respectively. Three and four customers accounted for approximately 74 percent and 73 percent of revenues as of and for the years ended December 31, 2018 and 2017, 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. 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. 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.

 

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 December 31, 2018 and 2017; as a result, no impairment has been recognized in the accompanying financial statements.

 

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.

 

 

 

  F-31  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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.

 

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, 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.

 

Interest and penalties associated with tax positions are recorded in the period assessed. No interest or penalties have been assessed as of December 31, 2018. The Company's information returns for tax years subject to examination by tax authorities include the date of the Company's inception through the current period for federal and state tax reporting purposes.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2018 and 2017 was 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-32  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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.

 

Unaudited Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO

 

Pro forma basic net loss per share attributable to common stockholders is computed to give effect to (i) the automatic conversion of all redeemable convertible Series A, B, C and F preferred shares outstanding, Series 1 and 2 common shares, convertible notes payables, related party notes payable and accrued fees to a related party ,stock options and warrants had automatically converted into an aggregate of 8,000,000 shares of common stock and (ii) the issuance of 800,000 shares of common stock for the repayment of $4,000,000 of bank debt by a stockholder. For purpose of the pro forma net loss per share calculation the weighted-average shares used in the computation of net loss per share attributable to common stockholders were adjusted for the reserve stock split in connection with the corporate conversion using the ratio of 101.717107 as described in Note 10.

 

The pro forma net loss per share information in the statement of operations as of December 31, 2018 has been prepared to give effect to:

 

· the Conversion of the Convertible Notes into 1,556,419 shares of common stock;
· the Conversion of A Preferred shares into 20,768 shares of common stock;
· the Conversion of B Preferred shares into 21,568 shares of common stock;
· the Conversion of C Preferred shares into 1,494,282 shares of common stock;
· the Conversion of F Preferred shares into 1,210,610 shares of common stock;
· the Conversion of Series 1 and 2 Common shares into 1,014,144 shares of common stock;
· the Issuance of 800,000 shares of common stock for the repayment of $4 million of bank debt by a stockholder;
· the Conversion of related party notes payable and accrued fees to a related party into 1,452,062 shares of common stock.

 

Geographic Locations & Segments

 

For the years ended December 31, 2018 and 2017, revenue attributable to customers in the United States were 100% and 100%, respectively. For the years ended December 31, 2018 and 2017, 100% of our net assets are located within the United States. The Company defines the term “chief operating decision maker” to be our Chief Executive Officer. Our Chief operating decision maker allocates resources and assesses financial performance based upon discrete financial information at the enterprise level. Accordingly, we have determined that we operate as a single operating and reportable segment.

 

Comprehensive Income (Loss)

 

The Company has no items comprising other comprehensive income or loss and accordingly comprehensive loss and net loss are identical for all periods presented.

 

 

 

 

 

  F-33  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

 

Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 16-02, Leases, which will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right-to-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease-related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new lease guidance will be effective for the Company's year ending December 31, 2020 and will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The new lease standard could have a significant effect on the Company’s financial statements as a result of the Company's operating leases, as disclosed in Note 7, that will be reported on the balance sheet at adoption. Upon adoption, the Company will recognize a lease liability and corresponding right-to-use asset based on the present value of the minimum lease payments. The effects on the results of operations are not expected to be significant as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. ASU 2014-09 defines a five step process to achieve this core principle (that we should recognize revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services provided) that requires more judgment and estimates within the revenue recognition process than are required under present U.S. GAAP. These judgments and estimates may include identifying each performance obligation in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. ASU 2016-12 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant additional judgments and changes in existing judgments.

 

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 in no cumulative effect adjustment to the opening balance of accumulative 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.

 

Note 2 – Going Concern and Uncertainty

 

The accompanying financial statements are presented assuming that the Company will continue as a going concern. However, during the fiscal year ended December 31, 2018 we incurred a net loss of approximately $3.5 million 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 in 2019 for operations totaling $1,656,463 as described in Subsequent Events (Note 11); however, will need to continue to secure additional funding. 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 3 - Balance Sheet Disclosures

 

Depreciation and expense for the years ended December 31, 2018 and 2017 was $278,724 and $159,254 respectively.

 

 

 

  F-34  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Accounts payable and accrued liabilities consist of the following:

 

    December 31,  
    2018     2017  
Accounts payable   $ 536,251     $ 589,419  
Accrued interest     33,166       23,083  
Credit cards payable     5,194       12,500  
    $ 574,611     $ 625,002  

 

Note 4 - Line-of-Credit

 

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 December 31, 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 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 December 31, 2018 and 2017 was $6,000,000.

 

Note 5 - Notes Payable to a Related Party

 

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 (Note 8).

 

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 paid by the Company on the collateral arrangement 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 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. The collateral agreement expires and automatically renews on the effective date each year which is April 13th. The next expiration and renewal is April 13, 2020.

 

 

 

  F-35  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Note 7 - Commitments and Contingencies

 

Operating Lease

 

The Company leases office space under a non-cancelable operating lease. Rent expense for the years ended December 31, 2018 and 2017 was approximately $153,000 and $140,000, respectively. Future minimum lease payments under this lease are approximately $39,000 in 2019. This lease expired on March 31, 2019 and is currently leased on a month-to-month basis.

 

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.

 

Collateral Agreement

 

So long as the bank credit agreement described in Note 4 remains outstanding and requires collateral under the collateral agreement described in Note 6 the Company has an annual commitment to the shareholder providing the collateral agreement to pay collateral fees of $710,000 and to issue 300,000 warrants to purchase common stock of the Company.

 

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.

 

At December 31, 2018 and 2017, there were 186,271,597 and no shares of Series C no par preferred authorized, issued and outstanding, liquidation preference of $ 35,510,665.

 

At December 31, 2018 and 2017, there were 2,316,377 and 14,774,990 shares of Series B no par value preferred authorized, issued and outstanding, liquidation preference of 1.5x original issue price of $1.0435 plus accumulated dividends which totaled $ 4,342,065 at December 31, 2018.

 

At December 31, 2018 and 2017, there were 2,975,000 and 8,275,000 shares of Series A no par value preferred authorized, issued and outstanding, liquidation preference of $1.00 per share which totaled $2,975,000 and $8,275,000 at December 31, 2018 and 2017, respectively.

 

 

 

  F-36  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

At December 31, 2018 and 2017, there were 117,722,097 shares of Series F no par value preferred authorized, issued and outstanding.

 

At December 31, 2018 and 2017, there were 65,316,124 and 3,934,876 shares of Common no par value authorized, issued and outstanding.

 

In 2012, 147,436,152 shares of Series F were issued to the founder in exchange for services rendered and personal guarantees on debt financing. These shares were valued at zero. During 2013, 29,714,055 shares of Series F were canceled to reduce future potential dilution to current shareholders in consideration of the need to raise future equity capital.

 

In 2012, 5,000,000 shares of Series A were issued at a price of $1.00 per share, net of issuance costs of $30,686. In 2014, 3,275,000 shares of Series A were issued at $1.00 per share. During 2018, shareholders consented to converting 5,300,000 shares of Series A to Series C. As of December 31, 2018 and 2017, there were 2,975,000 and 8,275,000 shares of Series A, respectively, authorized, issued, and outstanding.

 

In 2015, Convertible Notes in the amount of $6,000,000 were converted into 5,749,880 shares of Series B at $1.0435 per share.

 

In 2016 and 2015, 967,895 and 2,758,884 shares of Series B were issued for cash proceeds of $1,009,998 and $2,878,895, respectively, at $1.0435 per share. Offering costs of $62,035 and $100,742 were incurred with the issuance during 2016 and 2015, respectively.

 

In 2017, Convertible Notes in the amount of $4,888,077 plus $190,097 in accrued interest were converted into 4,866,483 shares of Series B at $1.0435 per share. Offering costs of $46,372 were incurred with the issuance during 2017. Also, in 2017, 184,602 shares of Series B were issued at fair value of $192,632 at $1.0435 per share to Clip Digital shareholders (a related party). This transaction was the result of termination of Clip Digital, LLC which triggered investor rights that converted Clip Digital LLC investment amounts into Series B shares of the Company and treated as a deemed dividend.

 

In 2018 and 2017, 235,967 and 247,246 shares of Series B were issued for subscription receivables and cash of $246,231 and $258,001, respectively, at $1.0435 per share.

 

During 2018, the Company approved a stock exchange as described in Note 1 which has been 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, 354,576 and 131,782 shares of Series B were issued in exchange of notes payable to a related party for $370,000 and foregone wages of $137,515 at $1.0435 per share.

 

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 2018, 51,672,086, 4,530,861 and 4,497,827 shares of Series 1 Common shares were issued at $0.023 per share for cash proceeds of $1,188,458, for conversion of accrued interest of $104,210, and for subscriptions receivable of $103,450, respectively.

 

In 2018 and 2017, 680,474 and 0 options were exercised as severance to purchase Series 1, respectively.

 

 

 

  F-37  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Voting Rights

 

Generally, the Company's Board has the authority to make all decisions and take all actions without a vote of the shareholders. However, a list of certain specific matters requiring a vote of the Series F shareholders have been identified in the Company's Amended and Restated Limited Liability Company Agreement. Included in this list are the consolidation, liquidation, dissolution, or merger of the Company as well as other specific matters. When a vote is required, it must be approved by shareholders with a majority of the Shares.

 

The number of authorized members of the Board shall initially be fixed at three designated as follows: (i) one director to be designated by the majority holders of Series F; (ii) two directors to be designated by the holders of the majority of the common shares and preferred shares, voting together. The number of directors may be changed from time to time by a vote of the holders of a majority of the Shares, voting together, and by a majority vote of the then serving directors.

 

Anti-Dilution Rights

 

If, at any time after the issuance of Series C, the Company issues additional securities for which the price per share of the additional securities sold is less than the Series C original issue price per share, the Company shall issue to each holder of Series C that number of additional shares of Series C necessary to maintain the holder's percentage interest in the Company that existed prior to the additional securities being issued. The anti-dilution rights shall terminate immediately prior to a qualified financing round.

 

Dividends

 

The Series C shall accrue cumulative dividends at a rate of 8% per annum, compounding daily, from the date of issuance, whether or not declared. Provided the Company shall first have paid or set aside Series dividends, the Series B shall accrue cumulative dividends at a rate of 8% per annum, compounding daily, from date of issuance, whether or not declared. No dividends shall be paid to Series A, Series F, or common shareholders.

 

Liquidation

 

Upon liquidation of the Company, which would occur only upon a judicial decree of dissolution or approval by the Company and the shareholders holding a majority of the Shares, the assets of the Company will be distributed in the following priority: (i) to all creditors of the Company to pay all debts, liabilities, and obligations; (ii) the Series C shareholders until the Series C preference amount is paid in full (1.5x original issue price of $0.115 per share plus accrued unpaid dividends); (iii) the Series B shareholders until the Series B preference amount is paid in full (1.5x original issue price of $1.0435 per share plus accrued unpaid dividends); (iii) to Series A shareholders until the Series A preference amount ($1.00 per share) is paid in full; and (iv) ratably to all common, Series F and Series A shareholders based on their percentage interest in the Company. Profits and losses of the Company, after allocation required by Treasury Regulations under Section 704(b), shall be allocated among the shareholders equal to each shareholder's liquidation preference. The Company's Board, at its discretion, may also distribute funds to the shareholders in the same manner as a liquidation event.

 

Equity Incentive Plan

 

The Company adopted the 2013 Equity Incentive Plan (the "Plan"), under which the Company is authorized to grant employees, directors, and consultants of the Company up to 34,012,500 common share incentive options, non-statutory options, profit interests, and restricted share awards. The award price and vesting terms are determined by the Board of the Company and evidenced in the award agreement extended to the employee, director, or consultant. The options granted generally terminate 10 years from the date of grant and vest over various periods as determined by the Board of the Company. Forfeited or canceled options are available for reissue.

 

As of December 31, 2018, there was approximately $23,000 of unrecognized share-based compensation expense related to unvested awards, which is expected to be recognized through 2021. The total fair value of options granted during the years ended December 31, 2018 and December 31, 2017 were approximately $149,000 and $23,000, respectively. Total share-based compensation expense recognized during the years ended December 31, 2018 and 2017 related to the Company's options was approximately $141,000 and $35,000, respectively. As of December 31, 2018, 1,649,153 options were available for future issuance under the Plan.

 

 

 

  F-38  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

The following table presents the activity for common share options outstanding:

 

            Weighted  
      Non-Qualified     Average  
      Options     Exercise Price  
Outstanding - December 31, 2016       25,044,764     $ 0.016  
Granted       1,690,648       0.017  
Forfeited/canceled       (330,756 )     0.017  
Exercised              
Outstanding - December 31, 2017       26,404,657       0.016  
Granted       10,707,770       0.017  
Forfeited/canceled       (8,682,112 )     0.016  
Exercised       (680,474 )     0.017  
Outstanding - December 31, 2018       27,749,840     $ 0.016  

 

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

 

      Options Outstanding     Options Exercisable  
Exercise Prices     Number     Price*     Life*     Number     Price*  
$0.015       22,322,976     $ 0.015       4.86       22,322,976     $ 0.015  
$0.017       5,426,951       0.017       8.52       4,276,968       0.017  
Total - December 31, 2018       27,749,840     $ 0.016       5.57       26,600,124     $ 0.004  

 

* 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 years ended December 31, 2018 and 2017:

 

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

 

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 years ended December 31, 2018 and 2017.

 

 

 

  F-39  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Warrants

 

During 2018, the Company approved a stock exchange as described in Note 1 and as a result of the exchange of Series A and Series B shares to Series C shares, the Company granted warrants to purchase 45,259,271 shares of Series 1 common stock to the Series A and B shareholders that participated. The non-participant shareholders of Series A and B were granted warrants to purchase 5,490,044 shares of Series 1 common stock. The fair value of the warrants was estimated using the Black-Scholes option pricing model with the following inputs: term of five years, discount rate of 2.5%, volatility of 109%, and a price of $0.023. The relative fair value of the warrants was estimated, and the warrants were valued accordingly at approximately $192,000.

 

In connection with the 2017 and 2018 renegotiation of the line-of-credit and related collateral agreements with shareholders (Note 4), the Company granted one of the shareholders warrants to purchase 2,721,898 and 2,721,898 shares of Series 1 with an exercise price of $0.001. All warrants vest immediately and expire during 2022 and 2023. The fair value of the warrants was estimated using the Black-Scholes option pricing model with the following inputs: term of five years, discount rate of 1.5%, volatility of 109%, and a price of $0.017. The relative fair value of the warrants was estimated, and the warrants were valued accordingly at approximately $43,000 and $43,000 and classified as interest expense.

 

In connection with convertible debt issued in 2016 and 2017, the Company granted warrants to purchase 6,030,092 shares of Series 1 with an exercise price of $0.001. All warrants vest immediately and expire in 2022. The fair value of the warrants was estimated using the Black-Scholes option pricing model with the following inputs: term of five years, discount rate of 1.5%, volatility of 109%, and a price of $0.017. The relative fair value of the warrants was estimated, and the warrants were valued accordingly at approximately $105,311 and classified as a discount to the Series B preferred stock.

 

No warrants were exercised during the years ended December 31, 2018 and 2017. The following table presents the activity for warrants outstanding:

 

    Series 1     Weighted  
    Common Share     Average  
    Warrants     Exercise Price  
Outstanding - December 31, 2016     5,516,924     $ 0.100  
Granted     5,956,965       0.001  
Forfeited/canceled            
Exercised            
Outstanding - December 31, 2017     11,473,889       0.010  
Granted – non-participants of Series A and B shares     5,490,044       0.023  
Granted – participants of Series A and B shares     45,259,271       0.011  
Forfeited/canceled            
Exercised            
Outstanding - December 31, 2018     62,223,204     $ 0.011  

 

All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of approximately 1.48 years as of December 31, 2018.

 

 

 

  F-40  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

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.

 

For the years ended December 31, 2018 and 2017 our potential dilutive shares relating to stock options shares, 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 years ended December 31, 2018 and 2017:

 

      December 31  
      2018       2017  
                                 
      Class A       Series F       Class A       Series F  
      Common (1)       Preferred (2)       Common (1)       Preferred (2)  
Numerator                                
Net loss   $ (3,510,011 )   $ (3,510,011 )   $ (2,717,654 )   $ (2,717,654 )
Preferred stock dividends     (5,034,702 )     (5,034,702 )     (1,469,881 )     (1,469,881 )
Attributable Loss     (8,544,713 )     (8,544,713 )     (4,187,535 )     (4,187,535 )
                                 
Net loss allocated to Class A common           1,145,599             135,442  
Net loss allocated to Series F preferred shares     7,399,114             4,052,093        
Net loss allocated to Preferred shares (3)                        
                                 
Net loss attributable to each class of common Denominator   $ (1,145,599 )   $ (7,399,114 )   $ (135,442 )   $ (4,052,093 )
                                 
Weighted average basic shares outstanding     18,226,805       117,722,097       3,934,876       117,722,097  
Potential diluted shares                        
Weighted average diluted shares outstanding     18,226,805      

117,722 097

      3,934,876       117,722,097  
                                 
Net loss per share                                
Basic   $ (0.06 )   $ (0.06 )   $ (0.03 )   $ (0.03 )
Diluted   $ (0.06 )   $ (0.06 )   $ (0.03 )   $ (0.03 )

 

(1) Class A common stock includes series 1 and series 2 common shares

(2) Participating stock includes series F preferred shares with common shares

(3) Series A, Series B, Series C of preferred shares were not contractually obligated to participate in losses.

 

 

 

  F-41  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Preferred stock dividends consist of the following:

 

    December 31,  
    2018     2017  
Series B and Series C accumulating preferred stock dividends     1,614,050       1,277,249  
Deemed dividend for Series B preferred shares issued to Clip Digital shareholders           192,632  
Deemed dividend to Series A preferred stockholders for conversion of Series A into Series C preferred stock     3,228,200        
Deemed dividend for warrants issued to non-participating preferred stockholders     192,452        
      5,034,702       1,469,881  

 

The following potentially dilutive weighted average shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

    December 31,  
    2018     2017  
Stock Option Shares     27,917,380       26,404,656  
Convertible Series 1 Common Warrants     17,011,827       6,846,853  
Convertible Voting Preferred Shares, Series A, B, and C     54,444,099       23,049,900  
      99,373,306       56,301,409  

 

Note 10- Pro Forma Net Loss Per Share Upon Completion of a Qualifying IPO (Unaudited)

 

Pro forma net income per share as of the period December 31, 2018 upon completion of a qualifying IPO is computed as follows (in millions, except share amounts which are reflected in thousands, and per share amounts):

    Year Ended  
    December 31,  
    2018  
Numerator:        
Pro forma net loss attributable to common shares - basic   $ (3,510,011 )
Pro forma net loss attributable to common shares - diluted   $ (3,510,011 )
         
Denominator:        
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic(1)     179,191  
Pro forma adjustment to reflect automatic conversion of all convertible preferred shares to common stock     2,747,228  
Pro forma adjustment to reflect convertible notes to common stock     1,556,419  
Pro forma adjustment to reflect shares issued to a stockholder for repayment of $4M of bank debt     800,000  
Pro forma adjustment to reflect conversion of related party notes payable and accrued fees to related party     1,452,062  
Weighted-average shares used to compute pro forma per share - basic     6,734,900  
Pro forma net loss per share attributable to common shares - basic   $ (0.52 )
         
Weighted-average share used to compute pro forma net loss per share – dilutive     6,734,900  
Pro forma net loss per share attributable to common shares – diluted   $ (0.52 )
         
(1)     The weighted-average shares were recomputed for the reverse stock split using the ratio of 101.717107.        

 

 

 

 

  F-42  

 

 

CLIP INTERACTIVE, LLC

Notes to Financial Statements

For the years ended December 31, 2018 and 2017

 

Note 11 - Subsequent Events

 

The Company has evaluated all subsequent events through January 27, 2020, which is the date the financial statements were available for issuance and concluded there were no material subsequent events requiring disclosure except those described below.

 

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 agreement with a shareholder for the collateral arrangement described in Note 6 – Related Party Transactions was converted into a long-term note totaling $725,000 due upon maturity on March 31, 2020. The collateral agreement was extended under similar terms.

 

In 2019, an additional 127,045 shares of Series B were issued at $1.0435 per share or $132,571 to four shareholders in connection with an extension of the 2018 pay to play financing. 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 12,008,057 Series C shares being issued at $0.115 per share in exchange for 1,050,000 Series A shares, 146,450 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.

 

During 2019, the Company entered into notes payable agreement with Mr. Thramann for $80,000, and two unrelated parties for $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 the 2020 Notes, described above. One other existing investor, who was owed $7,197 for services by the company, also agreed to convert his payable into the 2020 Notes, described above.

 

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 was paid in January 2020.

 

In November 2019, the Company sold $477,010 of Series 1 common shares to existing investors (the “Series 1 Investors”). In December 2019, after receiving the unanimous consent of the Series 1 Investors, the Company converted the common shares into additional 2020 Notes.

 

Also, in November 2019, an investor defaulted on 25% or $23,414 of his Equity Note Receivable issued in connection with a financing round completed earlier in 2019. A total of 1,917,992 Series C Preferred shares were cancelled which were previously issued at a conversion rate of 9.07:1.00 for the series A and B preferred shares effectively reversing 25% of the earlier transaction. As a result, the exchange transaction was rescinded resulting in 187,500 shares of Series A Preferred being re-issued at $1.00 per share and 23,896 shares of Series B Preferred shares were re-issued at $1.0435 per share in connection with the default. An additional 203,580 Series C Preferred shares at $0.115/share were also forfeited. The defaulting shareholder was reissued 422,792 shares of Series 1 Common Stock Warrants previously issued for giving consent to the pay to play dilution as a non-participant as a result of subsequently defaulting on his participation. The investor also forfeited 28,934 Series 1 Common Warrants.  

 

 

 

 

  F-43  

 

 

1,800,000 shares

of Common Stock

 

 

 

 

 

 

 

 

 

 

CLIP INTERACTIVE, INC.

 

 

 

 

 

 

 

 

PROSPECTUS

 

 

 

 

 

 

 

 

 

January ___, 2020

 

 

 

 

 

 

   

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable in connection with the sale of common stock being registered. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the Financial Industry Regulatory Authority filing fee and the Exchange listing fee.

 

Securities and Exchange Commission registration fee   $    
Financial Industry Regulatory Authority filing fee        
Exchange listing fee        
Legal fees and expenses        
Accountants’ fees and expenses        
Printing expenses        
Transfer agent and registrar fees and expenses        
Miscellaneous        
Total   $    

 

Item 14. Indemnification of Directors and Officers.

 

We are incorporated under the laws of the state of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such person as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses that such officer or director has actually and reasonably incurred. Our charter and bylaws provide for the indemnification of our directors and officers to the fullest extent permitted under the Delaware General Corporation Law.

 

 

 

  II-1  
 

 

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for:

 

  ·   any breach of the director’s duty of loyalty to the corporation or its stockholders;

 

  ·   any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  ·   any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or

 

  ·   any transaction from which the director derived an improper personal benefit.

 

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our charter also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.

 

As permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that:

 

  ·   we may indemnify our directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions;
       
  ·   we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and
       
  ·   the rights provided in our bylaws are not exclusive.

 

Section 174 of the Delaware General Corporation Law provides, among other things, that a director who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption may be held liable for such actions. A director who was either absent when the unlawful actions were approved, or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

 

As permitted by the Delaware General Corporation Law, we have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. Under the terms of our indemnification agreements, we are required to indemnify each of our directors and officers, to the fullest extent permitted by the laws of the state of Delaware, if the basis of the indemnitee’s involvement was by reason of the fact that the indemnitee is or was a director, or officer, of the company or any of its subsidiaries or was serving at the company’s request in an official capacity for another entity. We must indemnify our officers and directors against (1) attorneys’ fees and (2) all other costs of any type or nature whatsoever, including any and all expenses and obligations paid or incurred in connection with investigating, defending, being a witness in, participating in (including on appeal) or preparing to defend, be a witness or participate in any completed, actual, pending or threatened action, suit, claim or proceeding, whether civil, criminal, administrative or investigative, or establishing or enforcing a right to indemnification under the indemnification agreement. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act.

 

 

 

  II-2  
 

 

In addition, we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances.

 

The form of Underwriting Agreement, to be filed as Exhibit 1.1 hereto, provides for indemnification by the underwriters of us and our officers who sign this Registration Statement and directors for specified liabilities, including matters arising under the Securities Act.

 

Item 15. Recent Sales of Unregistered Securities.

 

During the three-year period preceding the date of filing of this registration statement, we have issued securities in the transactions described below without registration under the Securities Act.

 

Clip Interactive, LLC

 

In the three years preceding the filing of this registration statement, Clip Interactive, LLC issued the following securities that were not registered under the Securities Act (since January 1, 2016):

 

In 2016, 967,895 shares of Series B Preferred Stock were issued for cash proceeds of $1,009,998 at $ 1.0435 per share.

 

In 2017, Convertible Notes in the amount of $4,888,077 plus $190,097 in accrued interest were converted into 4,866,483 shares of Series B at $1.0435 per share. Issuance costs of $46,372 were incurred with the issuance during 2017. Also in 2017, 184,602 shares of Series B were issued at fair value of $192,632 at $1.0435 per share to Clip Digital shareholders (a related party). This transaction was the result of termination of Clip Digital, LLC which triggered investor rights that converted Clip Digital LLC investment amounts into Series B shares of the Company.

 

In 2018 and 2017, 235,967 and 247,246 shares of Series B were issued for subscription receivables and cash of $246,231 and $258,001, respectively, at $1.0435 per share.

 

In 2018, we issued 2,049,396 Series B preferred shares for cash totaling $2,138,545.

 

During 2018, the Company approved a share exchange as described in Note 1 which has been 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, 354,516 and 131,782 shares of Series B were issued in exchange of notes payable to a related party for $370,000 and foregone wages of $137,515 at $1.0435 per share.

 

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 15,230,334 Series B shares.

 

In 2018, 51,672,086, 4,530,861 and 4,497,827 shares of Series 1 Common Shares were issued at $0.023 per share for cash proceeds of $1,188,458, for conversion of accrued interest of $104,210, and for subscriptions receivable of $103,450, respectively.

 

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.

 

 

 

  II-3  
 

 

During 2019 the agreement with a shareholder for a collateral arrangement was converted into a long-term note totaling $725,000 due upon maturity on March 31, 2020. The collateral agreement was extended under similar terms.

 

In 2019, an additional 127,045 shares of Series B were issued at $1.0435 per share or $132,571 to four shareholders in connection with an extension of the 2018 “Pay to Play” financing. 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 shareholders received 12,008,057 Series C shares at $0.115 per share in exchange for 1,050,000 Series A shares, 146,450 Series B shares and 127,045 additional Series B shares. 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.

 

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.

 

During 2019, the Company began a Convertible Note financing which accrues 6% interest and converts at the effective date of this registration statement at a 30% discount to the IPO price and raised $462,500. Upon the IPO, a beneficial conversion feature will be recorded due to the discount estimate of 30%. The amount will be recorded as additional interest for the convertible notes on the statement of operations.

 

In October 2019 the Company obtained a $400,000 non interest short term loan from a related party. The Company was advanced $200,000 net of $12,000 in closing fees and the remainder $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 loan financing fees will be due on January 30, 2020.

 

In July 2019, the Company initiated a financing in the amount of $2.0 million in the form of a 6% Convertible Promissory Notes due December 31, 2019. In December of 2019, a majority of noteholders voted to extend the due date from December 31, 2019 to March 31, 2020.

 

Subsequent to September 30, 2019, the Company sold $75,000 of 6% Convertible Promissory Notes, due March 31, 2020, to two new investors that convert mandatorily to common stock at a 50% discount to the initial public offering price. In addition, the Company sold $842,265 of a new of 6% Convertible Promissory Notes, due March 31, 2020, (the 2020 Notes) with a mandatory conversion into common shares at a 75% discount to the initial public offering price.

 

During 2019, the Company entered into notes payable (the "Notes") 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 the 2020 Notes, described above.

 

Also subsequent to September 30, 2019, the Company initiated the sale of Series 1 Common shares to existing investors. Sale of the Series 1 Common terminated on November 30,2019 and raised $477,010. In December 2019, the Company proposed terminating the prior sale of the Series 1 Common and converting the investment into the 2020 Notes. All investors in the Series 1 Common were notified of the proposed change. Unanimous approval was documented by all investors executing subscription agreements terminating their Series 1 Common subscriptions and reallocating their investment into the 2020 Notes.

 

 

 

 

 

  II-4  
 

 

In November 2019, an investor defaulted on 25% or $23,414 of his Equity Note Receivable issued in connection with a financing round completed earlier in 2019. A total of 1,917,992 Series C Preferred shares were cancelled which were previously issued at a conversion rate of 9.07:1.00 for the series A and B preferred shares effectively reversing 25% of the earlier transaction. As a result, the exchange transaction was rescinded resulting in 187,500 shares of Series A Preferred being re-issued at $1.00 per share and 23,896 shares of Series B Preferred shares were re-issued at $1.0435 per share in connection with the default. An additional 203,580 Series C Preferred shares at $0.115/share were also forfeited. The defaulting shareholder was reissued 422,792 shares of Series 1 Common Stock Warrants previously issued for giving consent to the pay to play dilution as a non-participant as a result of subsequently defaulting on his participation. The investor also forfeited 28,934 Series 1 Common Warrants.

 

These sales and issuances were made in reliance upon Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D, Rule 506 (d), and did not involve any underwriters, underwriting discounts or commissions, or any public offering. The persons and entities who received such securities have represented their intention to acquire these securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends are be affixed to all share certificates issued. All recipients have adequate access through their relationship with us to information about us.

 

All of the foregoing securities, except those shares that are being registered pursuant to this registration statement, are deemed restricted securities for purposes of the Securities Act. All certificates representing the restricted shares of capital stock described above, included appropriate legends setting forth that the securities have not been registered and the applicable restrictions on transfer.

 

In 2018, 680,474 options were exercised as severance to purchase Series 1 common stock.

 

Upon the Conversion, the Company will issue 800,000 common shares to Jeffrey Thramann in consideration of his payment to the bank of $4,000,000 in Company indebtedness to the bank.

 

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and the Registrant believes each transaction was exempt from the registration requirements of the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated under the Securities Act. Furthermore, the Registrant affixed appropriate legends to the share certificates and instruments issued in each foregoing transaction setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

Item 16. Exhibits and Financial Statement Schedules.

 

(a) Exhibits. The following exhibits are filed as part of this Registration Statement:

 

Exhibit

number

  Description
   
1.1   Form of Underwriting Agreement
 2.1   Reserved
2.2   Form of Plan of Conversion
2.3   Reserved
2.4 * Form of Certificate of Conversion of Clip Interactive, LLC
3.1 *** Fourth Amended and Restated Limited Liability Company Agreement, dated October 19, 2018
  3.2 *** Fourth Amended and Restated Limited Liability Company Agreement, Amendment 1, dated March 22, 2019
  3.3 *** Form of Certificate of Incorporation of Auddia, Inc. (to be effective upon completion of the Registrant’s conversion from a limited liability company to a corporation)
  3.4 *** Form of Bylaws of Auddia, Inc. (to be effective upon completion of the Registrant’s conversion from a limited liability company to a corporation)
   3.5   Form of Warrant after Conversion form an LLC to a Corporation
  4.1 * Form of Common Stock Certificate
  5.1 * Form of Opinion of Bingham & Associates Law Group APC
 10.1 *** Employment Agreement of Michael T. Lawless
  10.2 *** Employment Agreement of Peter Shoebridge
  10.3 *** Clip Interactive, LLC Amended and Restated Equity Incentive Plan
   10.4   Collateral and Security Agreement with Related Party (Minnicozzi)
  10.5 * Form of Amendment to Collateral and Security Agreement with Related Party
  10.6   Form of Convertible Promissory Note
  10.7   Business Loan Agreement and Guaranty of Related Party with Bank of the West
  10.8   Agreement with Major United States Broadcast Company**
  23.1   Consent of Plante & Moran PLLC, Independent Registered Public Accounting Firm
  23.2 * Consent of Bingham & Associates Law Group APC (included in Exhibit 5.1)
  24.1   Power of Attorney (included on signature page)
  99.1   Consent of Stephen Deitsch
  99.2   Consent of James Booth
  99.3   Consent of Michael Lawless

____________________________

* To be filed by Amendment to this Registration Statement 
** Certain information contained in this Exhibit has been redated and appears as “XXXXX” as the disclosure of same would be a disadvantage to the Registrant in the marketplace
*** Previously filed

 

(b) Financial Statement Schedules. None.

 

 

 

  II-5  
 

 

Item 17. Undertakings.

 

(A) The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increases or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

 

(i) If the registrant is relying on Rule 430B:

 

(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

 

 

 

  II-6  
 

 

(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(6) To provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

(B) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(C) The undersigned registrant hereby undertakes that:

 

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

 

 

 

 

  II-7  
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Denver, in the State of Colorado, on this 28th day of January, 2020.

 

  CLIP INTERACTIVE, LLC
     
  By:  

/s/ Michael Lawless

      Michael Lawless
      Chief Executive Officer

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey Thramann and Michael Lawless his or her true and lawful attorneys-in-fact and agents, with full power to act separately and full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Michael Lawless   Chief Executive Officer and Director   January 28, 2020
Michael Lawless   (Principal Executive Officer)    
    President and Director    
         
         
/s/ Richard Liebman   Chief Financial Officer   January28, 2020
Richard Liebman   (Principal Financial and Accounting Officer)    
         
         
/s/ Jeffery Thramann   Chairman of the Board of Directors   January 28 2020
Jeffrey Thramann        
         

 

 

 

 

 

 

 

  II-8  
 

 

EXHIBIT INDEX

 

 

Exhibit

number

  Description
   
1.1   Form of Underwriting Agreement
 2.1   Reserved
2.2   Form of Plan of Conversion
2.3   Reserved
2.4 * Form of Certificate of Conversion of Clip Interactive, LLC
3.1 *** Fourth Amended and Restated Limited Liability Company Agreement, dated October 19, 2018
  3.2 *** Fourth Amended and Restated Limited Liability Company Agreement, Amendment 1, dated March 22, 2019
  3.3 *** Form of Certificate of Incorporation of Auddia, Inc. (to be effective upon completion of the Registrant’s conversion from a limited liability company to a corporation)
  3.4 *** Form of Bylaws of Auddia, Inc. (to be effective upon completion of the Registrant’s conversion from a limited liability company to a corporation)
   3.5   Form of Warrant after Conversion form an LLC to a Corporation
  4.1 * Form of Common Stock Certificate
  5.1 * Form of Opinion of Bingham & Associates Law Group APC
 10.1 *** Employment Agreement of Michael T. Lawless
  10.2 *** Employment Agreement of Peter Shoebridge
  10.3 *** Clip Interactive, LLC Amended and Restated Equity Incentive Plan
   10.4   Collateral and Security Agreement with Related Party (Minnicozzi)
  10.5 * Form of Amendment to Collateral and Security Agreement with Related Party
  10.6   Form of Convertible Promissory Note
  10.7   Business Loan Agreement and Guaranty of Related Party with Bank of the West
  10.8   Agreement with Major United States Broadcast Company**
  23.1   Consent of Plante & Moran PLLC, Independent Registered Public Accounting Firm
  23.2 * Consent of Bingham & Associates Law Group APC (included in Exhibit 5.1)
  24.1   Power of Attorney (included on signature page)
  99.1   Consent of Stephen Deitsch
  99.2   Consent of James Booth
  99.3   Consent of Michael Lawless

____________________________

* To be filed by Amendment to this Registration Statement 
** Certain information contained in this Exhibit has been redated and appears as “XXXXX” as the disclosure of same would be a disadvantage to the Registrant in the marketplace
*** Previously filed

 

 

 

  II-9  

 

Exhibit 3.3

 

CERTIFICATE OF INCORPORATION

 

OF

 

AUDDIA INC.

 

A DELAWARE CORPORATION

 

ARTICLE I.

 

The name of this company is AUDDIA INC. (the “Company”).

 

ARTICLE II.

 

The address of the registered office of the Company in the State of Delaware is 1209 N. Orange Street, in the City of Wilmington, County of New Castle, 19801, and the name of the registered agent of the Company in the State of Delaware at such address is Corporation Trust Company.

 

ARTICLE III.

 

The purpose of the Company is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law (“DGCL”).

 

ARTICLE IV.

 

A.       This Company is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the Company is authorized to issue is one hundred ten (110,000,000) shares. One hundred million (100,000,000) shares shall be Common Stock, having a par value per share of $0.001. Ten Million (10,000,000) shares shall be Preferred Stock, having a par value per share of $0.001.

 

B.       The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Company (the “Board of Directors”) is hereby expressly authorized to provide for the issue of all or any of the shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is also expressly authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of the stock of the Company entitled to vote thereon, without a separate vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any certificate of designation filed with respect to any series of Preferred Stock.

 

 

 

  1  
 

 

C.       Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Company for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock).

 

ARTICLE V.

 

For the management of the business and for the conduct of the affairs of the Company, and in further definition, limitation and regulation of the powers of the Company, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:

 

A.       MANAGEMENT OF BUSINESS. The management of the business and the conduct of the affairs of the Company shall be vested in its Board of Directors. The number of directors which shall constitute the Board of Directors shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the Board of Directors.

 

B.       BOARD OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders. Each director shall hold office until the next annual meeting of stockholders and thereafter until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

 

C.       REMOVAL OF DIRECTORS.

 

1.       Subject to the rights of any series of Preferred Stock to elect additional directors under specified circumstances, neither the Board of Directors nor any individual director may be removed without cause.

 

2.       Subject to any limitation imposed by applicable law, any individual director or directors may be removed with cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all then-outstanding shares of capital stock of the Company entitled to vote generally at an election of directors.

 

D.       VACANCIES. Subject to any limitations imposed by applicable law and subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders and except as otherwise provided by applicable law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and qualified.

 

 

 

  2  
 

 

E.       BYLAW AMENDMENTS.

 

1.       The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the Company. Any adoption, amendment or repeal of the Bylaws of the Company by the Board of Directors shall require the approval of a majority of the authorized number of directors. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Company; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Company required by law or by this Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class.

 

2.       The directors of the Company need not be elected by written ballot unless the Bylaws so provide.

 

3.       No action shall be taken by the stockholders of the Company except at an annual or special meeting of stockholders called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent or electronic transmission.

 

4.       Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Company shall be given in the manner provided in the Bylaws of the Company.

 

ARTICLE VI.

 

A.       The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law.

 

B.       To the fullest extent permitted by applicable law, the Company is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Company (and any other persons to which applicable law permits the Company to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise in excess of the indemnification and advancement otherwise permitted by such applicable law. If applicable law is amended after approval by the stockholders of this Article VI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director to the Company shall be eliminated or limited to the fullest extent permitted by applicable law as so amended.

 

C.       Any repeal or modification of this Article VI shall only be prospective and shall not affect the rights or protections or increase the liability of any director under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.

 

 

 

 

  3  
 

 

ARTICLE VII.

 

Unless the Company consents in writing to the selection of an alternative forum, to the fullest extent permitted by law the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the Company; (B) 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; (C) any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the DGCL, this Certificate of Incorporation or the Bylaws of the Company; or (D) any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine. This Article VI shall not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended or any other claim for which the federal courts have exclusive jurisdiction.

 

Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.

 

Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and to have consented to the provisions of this Article VII.

 

ARTICLE VIII.

 

A.       The Company reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VIII, and all rights conferred upon the stockholders herein are granted subject to this reservation.

 

B.       Notwithstanding any other provisions of this Certificate of Incorporation or any provision of applicable law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Company required by law or by this Certificate of Incorporation or any certificate of designation filed with respect to a series of Preferred Stock, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, VII and VIII.

 

ARTICLE XII.

The name and address of the incorporator are as follows:

 

  Michael Lawless 5755 Central Avenue C
    Boulder, CO 80301

 

 

 

 

 

  4  
 

 

ARTICLE XIII.

 

The powers of the incorporator are to terminate upon the filing of this Certificate of Incorporation with the Secretary of State of the State of Delaware. The names and mailing addresses of the persons who are to serve as the initial directors of the Corporation until the first annual meeting of stockholders of the corporation, or until their successors are duly elected and qualified, are:

 

  Jeffrey Thramann 5755 Central Avenue C
    Boulder, CO 80301
     
  Michael Lawless 5755 Central Avenue C
    Boulder, CO 80301
     
  Stephen Deitsch 5755 Central Avenue C
    Boulder, CO 80301
     
  James Booth 5755 Central Avenue C
    Boulder, CO 80301

 

 

 

***

 

IN WITNESS WHEREOF, the undersigned incorporator has executed this Certificate of Incorporation on _______________, 2020.

 

  By: ______________________
  Michael Lawless
  Incorporator
   
   

 

 

 

  5  

 

Exhibit 3.5

 

 

[Form of Common Stock Warrant]

 

THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

AUDDIA INC.

 

WARRANT TO PURCHASE COMMON STOCK

 

WC2020-[●●] _________ [●●], 2020
   
  Original Issue Date: _________ [●●], 20__

 

 

Void After October [●●], 2023

 

This Warrant To Purchase COMMON STOCK Certifies That, for value received, __________________, or his, her or its assigns (the “Holder”), is entitled to subscribe for and purchase at the Exercise Price (defined below) from Auddia Inc. a Delaware corporation, with its principal office at 5755 Central Avenue, Suite C, Boulder, CO 80301 (together with its successors, the “Company”) up to _________ Exercise Shares (as defined below and subject to adjustments as described below).

 

1.                   Definitions. As used herein, the following terms shall have the following respective meanings:

 

(a)               Exercise Period” shall mean the period commencing with the date hereof and ending five years from the date hereof, unless sooner terminated as provided below.

 

(b)               Exercise Price” shall mean $0.___ per share, subject to adjustment pursuant to Section 5 below.

 

(c)               Exercise Shares” shall mean the shares of Common Stock of the Company (the “Shares”), issuable upon exercise of this Warrant to Purchase Common Stock (this “Warrant”).

 

2.                  Exercise of Warrant. The rights represented by this Warrant may be exercised in whole or in part at any time during the Exercise Period, by delivery of the following to the Company at its address set forth above (or at such other address as it may designate by notice in writing to the Holder):

 

(a)               An executed Notice of Exercise in the form attached hereto;

 

(b)               Payment of the Exercise Price either (i) in cash or by check, or (ii) by cancellation of indebtedness; and

 

(c)               This Warrant.

 

 

 

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Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or persons affiliated with the Holder, if the Holder so designates, shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised.

 

The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the share transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the share transfer books are open.

 

2.1                Net Exercise. Notwithstanding any provisions herein to the contrary, if the fair market value of one of the Shares is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment of cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise in which event the Company shall issue to the Holder a number of Shares computed using the following formula:

 

     

X = Y (A-B)

            A

       
  Where X =   the number of Shares to be issued to the Holder
       
Y =   the number of Shares purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation)
       
A =   the fair market value of one Share of the Company (at the date of such calculation)
       
B =   Exercise Price (as adjusted to the date of such calculation)

 

For purposes of the above calculation, the fair market value of one Share shall be determined by the Company’s Board of Directors or similar governing body in good faith but shall in no event be less than the then-current liquidation value thereof; provided, however, that in the event the Company makes an initial public offering of its Shares the fair market value per share shall mean: (x) if traded on a securities exchange or the NASDAQ National Market, the fair market value of the Shares shall be deemed to be the average of the closing or last reported sale prices of the Shares on such exchange or market over the 30-day period ending five business days prior to the date of calculation, or (y) if otherwise traded in an over-the-counter market, fair market value of the Shares shall be deemed to be the average of the closing bid and ask prices of the Shares over the 30-day period ending five business days prior to the date of calculation.

 

3.                   Covenants of the Company.

 

3.1                Covenants as to Exercise Shares. The Company covenants and agrees that all Exercise Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued and outstanding, and free from all taxes, liens and charges with respect to the issuance thereof.

 

 

 

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3.2                 Notices of Record Date. In the event of any taking by the Company of a record of the holders of Shares for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the Company shall mail to the Holder, at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.

 

4.                   Representations of Holder.

 

4.1                Acquisition of Warrant for Personal Account. The Holder represents and warrants that it is acquiring the Warrant solely for its account for investment and not with a view to or for sale or distribution of said Warrant or any part thereof. The Holder also represents that the entire legal and beneficial interests of the Warrant and Exercise Shares the Holder is acquiring is being acquired for, and will be held for, its account only.

 

4.2                Securities Are Not Registered.

 

(a)               The Holder understands that the Warrant and the Exercise Shares have not been registered under the Securities Act of 1933, as amended (the “Act”) on the basis that no distribution or public offering of the stock of the Company is to be effected. The Holder realizes that the basis for the exemption may not be present if, notwithstanding its representations, the Holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The Holder has no such present intention.

 

(b)               The Holder recognizes that the Warrant and the Exercise Shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. The Holder recognizes that the Company has no obligation to register the Warrant or the Exercise Shares, or to comply with any exemption from such registration.

 

(c)                The Holder is aware that neither the Warrant nor the Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale following the required holding period under Rule 144 and the number of shares being sold during specified periods not exceeding specified limitations. Holder is aware that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company presently has no plans to satisfy these conditions in the foreseeable future.

 

4.3                 Disposition of Warrant and Exercise Shares.

 

(a)                The Holder further agrees not to make any disposition of all or any part of the Warrant or Exercise Shares in any event unless and until:

 

(i)               The Company shall have received a letter secured by the Holder from the Securities and Exchange Commission stating that no action will be recommended to the Commission with respect to the proposed disposition;

 

(ii)              There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with said registration statement; or

 

(iii)            The Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, the Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, for the Holder to the effect that such disposition will not require registration of such Warrant or Exercise Shares under the Act or any applicable state securities laws.

 

 

 

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(b)               The Holder understands and agrees that in the event certificates evidencing the shares are issued to the Holder, such certificates may bear the following or a similar legend:

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

 

5.                  Adjustment of Exercise Price. In the event of changes in the outstanding equity interests of the Company by reason of stock dividends, split-ups, recapitalizations, reclassifications, combinations or exchanges of equity interests, separations, reorganizations, liquidations, or the like, the number of equity interests available under the Warrant in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder of the Warrant, on exercise for the same aggregate Exercise Price, the total number, class, and kind of equity interests as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such equity interests until after the event requiring adjustment. The form of this Warrant need not be changed because of any adjustment in the number of Exercise Shares subject to this Warrant.

 

6.                   Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Exercise Shares (including fractions) issuable upon exercise of this Warrant may be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Company shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of an Exercise Share by such fraction.

 

7.                   Early Termination. In the event of, at any time during the Exercise Period, any capital reorganization, or any reclassification of the capital stock or equity of the Company (other than a change in par value or from par value to no par value or no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares); or any consolidation or merger of the Company with or into any other entity or person or any other reorganization, in which the equity holders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company’s voting power immediately after such consolidation, merger or reorganization; or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company’s voting power is sold or otherwise transferred (excluding any consolidation or merger effected exclusively to change the domicile of the Company); or any sale, lease, exclusive license or other disposition of all or substantially all of the assets of the Company; or any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall provide to the Holder ten (10) days advance written notice of such event, and this Warrant shall terminate unless exercised prior to the date of the occurrence of such event.

 

8.                   No Voting Rights. This Warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a member of the Company.

 

9.                   Transfer of Warrant. Subject to applicable laws, the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

10.                Replacement Warrant. This Warrant is being issued in replacement and cancellation of that certain warrant (the “Prior Warrant”) issued by Clip Interactive, LLC (the “Predecessor”) prior to (i) the Predecessor’s conversion from a limited liability company to a corporation and (ii) the Company’s registered initial public offering of its Common Stock. The Prior Warrant was originally issued by the Predecessor as of the Original Issue Date specified above. All obligations of the Predecessor relating to the Prior Warrant were assumed by the Company pursuant to the terms of the Predecessor’s plan of corporate conversion. This Warrant reflects all adjustments provided for by the terms of the Prior Warrant in respect of the conversion and the other adjustments made to the Predecessor’s capital stock prior to the effectiveness of the corporate conversion.

 

 

 

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11.                Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.

 

12.                Notices, etc. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex, electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at 5755 Central Avenue, Suite C, Boulder, CO 80301, and to the Holder at the address(es) set forth on the books and records of the Company or at such other address(es) as the Company or the Holder may designate by ten (10) days advance written notice to the other parties hereto.

 

13.                 Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.

 

14.                 Governing Law. This Warrant and all rights, obligations and liabilities hereunder shall be governed by the laws of the State of Colorado.

 

15.                 Amendment and Waiver. Any term of this Warrant may be amended or waived with the written consent of the Company and the Holder.

 

 

[Remainder of Page Intentionally Left Blank]

 

 

 

 

 

 

 

 

 

 

 

 

 

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In Witness Whereof, the Company has caused this Warrant to be executed by its duly authorized officer effective as of ____________ [●●], 2020.

 

 

  AUDDIA INC.
   
   
   
  By:
  Name: Michael Lawless
  Title: Chief Executive Officer
   
   
   
  HOLDER:
   
   
   
   
  (Signature)
   
   
   
  (Print name)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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NOTICE OF EXERCISE

 

TO: Auddia Inc.

 

(1)      ☐#61608;        The undersigned hereby elects to purchase ___________ [________] shares of Common Stock (the “Shares”) of Auddia Inc. (the “Company”) pursuant to the terms of the attached Warrant to Common Stock (the “Warrant”), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

           ☐        The undersigned hereby elects to purchase ___________ [________] Shares of the Company pursuant to the terms of the net exercise provisions set forth in Section 2.1 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2)       Please issue a certificate or certificates representing said Shares in the name of the undersigned or in such other name as is specified below:

 

 

__________________________________

(Name)

 

__________________________________

 

__________________________________

(Address)

 

(3)       The undersigned represents that (i) the aforesaid Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such Shares; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that the Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the period of time prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said registration statement, or the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

     

(Date)

 

(Signature)

     
     
    (Print name)

 

 

 

 

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ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form
and supply required information. Do not use this form

to purchase shares.)

 

 

For Value Received, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:    
    (Please Print)
     
Address:    
    (Please Print)
     
Dated:   ___________, 20__
     
     

Holder’s

Signature:

 

 

_____________________________________________________________

     
     

Holder’s

Address:

 

 

_____________________________________________________________

 

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of companies and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 

 

 

 

 

 

 

 

 

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Exhibit 10.4

 

EXECUTION VERSION

 

This COLLATERAL AND SECURITY AGREEMENT (the "Agreement") is entered into as of April 13, 2018 (the "Effective Date"), by and between Richard Michael Minicozzi and Janina Y. Minicozzi (together, "Minicozzi"), and Clip Interactive, LLC, a Colorado limited liability company (the ''Company").

 

RECITALS

 

A. Company is obtaining a new loan facility from Bank of the West (the "Lender") in an aggregate principal amount of $6,000,000 (the "BOTW Loan"), which is secured by the assets of the Company, on the terms set forth in: (i) that certain Promissory Note in $6,000,000 principal amount by and between the Company and Lender; (ii) Assignment of Deposit Account and Commercial Guaranty by and between Lender, the Company and Jeffrey Thramann; (iii) Assignment of Deposit Account by and among Minicozzi, the Company and Lender; and (iv) other ancillary certificates and documents among the parties thereto, each dated on or about the date hereof and as may be amended from time to time (the items in (i)-(iv) collectively, the "Loan Documents"), and the proceeds of which shall be used to repay all amounts owing by Company to Colorado Business Bank (the "Existing Loan");

 

B. Lender has required that certain cash collateral be provided as additional collateral support for the BOTW Loan; and Minicozzi has agreed to provide up to $2,000,000 in such additional collateral support as provided in the Loan Documents; and to grant Lender a security interest in an amount up to $2,000,000 held in an account maintained at Lender (the "Minicozzi Deposit Account").

 

C.  In consideration of and in connection with the foregoing, the Company and Minicozzi are entering into this Agreement

 

AGREEMENT

 

The parties agree as follows:

 

  1. ADDITIONAL COLLATERAL; PROMISE TO REPAY; GRANT OF SECURITY INTEREST.

 

1.1           Provision of Additional Collateral. Concurrently with the execution and delivery of this Agreement, Minicozzi hereby agrees to enter into that such agreements as may be required by Lender (the "Additional Collateral Documents") pursuant to which Minicozzi will subject up to $2,000,000 (the "Additional Collateral Amount") to a security interest in favor of the Lender, such that following Minicozzi's execution and delivery of the Additional Collateral Documents, the Additional Collateral Amount will be deemed "Collateral" under the Loan Documents, and shall be subject to the same obligations and restrictions (including the Lender's right of setoft) as the other cash collateral being provided to Lender to secure the BOTW Loan (collectively, the "Collateral Grant").

 

1.2           Promise to Repay. In the event any portion of the Additional Collateral Amount is applied to pay the obligations owing by Company to Lender (the "Applied Amount"), Company shall promptly issue to Minicozzi a promissory note in substantially similar form as attached hereto as EXHIBIT A as evidence of Borrower's promise to repay such Applied Amount (the "Note"). The obligations under the Note, if issued, will not alleviate the Company from its obligations to pay the Collateral Support Fee hereunder.

 

 

 

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1.3            Grant of Security Interest. To secure Company's payment obligations owing to Minicozzi under this Agreement and the Note, Company hereby grants Minicozzi a security interest in all of the assets and personal property (including accounts receivable) of Company. Company authorizes Minicozzi to file a financing statement to perfect this security interest, and Company will take such actions as Minicozzi deems appropriate from time to time to perfect or continue the security interest granted hereunder. Upon the occurrence and during the continuance of any default or noncompliance by Company of any obligations hereunder or the Note, or any event of default under the Loan Documents, Minicozzi may, at his election and without notice of his election and without demand, exercise any and all other rights and remedies available to Company as provided under the Colorado Uniform Commercial Code, by law, or in equity.

 

2. CONSIDERATION

 

2.1 Fees.

 

(a)                In exchange for the Collateral Grant, the Company will pay to Minicozzi a cash fee in the amount of (i) $710,000.00 plus (ii) the product of (A) $1,808 times (B) the number of days elapsed between April I, 2018 and the Effective Date ((i) and (ii) together, the "Initial Fee"), to be paid in lawful money of the United States of America via wire transfer by the Company to Minicozzi on or before April 30, 2018.

 

(b)                It is the intention of the Company and Minicozzi to strictly comply with applicable usury laws, if any. Accordingly, notwithstanding any provision of this Agreement, or the Note if issued, or the Warrant (in each case as such documents may be amended from time to time and collectively, the "Minicozzi Agreements") to the contrary, in no event shall the Minicozzi Agreements require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceeds the maximum amount permitted by any such applicable laws, as the same may be amended or modified from time to time. The Company and Minicozzi agree and acknowledge that the Collateral Support Fee and any other amounts payable under the Minicozzi Agreements comply with applicable Colorado usury laws and the Company agrees not to make and hereby waives any right that it has to pursue, any claim or defense of usury in connection with the Minicozzi Agreements, and shall indemnify Minicozzi against any losses that Minicozzi incurs as a result of a claim or defense of usury brought against Minicozzi (including for reasonable attorney's fees).

 

2.2          Warrant Issuance. Concurrently with the execution and delivery of this Agreement and the effectiveness of the Additional Collateral Documents, the Company shall issue to Minicozzi, a warrant to purchase up to 300,000 of the Company's Series 1 Common Shares in substantially the form attached hereto as EXHIBIT B (the "Warrant"). The exercise price of the Warrant is $0.01 per share.

 

2.3          Renewals; Extensions. In the event that the Additional Collateral Amount continues to act as collateral for the BOTW Loan pursuant to the Loan Documents and is still outstanding (or if at such time the BOTW Loan is in default and the Note has been issued to Minicozzi), on each anniversary of the Effective Date, Company shall (i) pay to Minicozzi an annual cash fee equal to the sum of (a) $660,000.00 (the "Base Amount") plus (b) the product of (I) the Base Amount times (II) the difference of (x) 1.4% and (y) the per annum rate of interest earned by Minicozzi on the Additional Collateral Amount while such is maintained in the Minicozzi Deposit Account plus (c) a $50,000 renewal fee (the amounts in (a)-(c) collectively, the "Renewal Fee") and (ii) issue to Minicozzi, an additional warrant to purchase up to 300,000 of the Company's Series 1 Common Shares in a form substantively similar to the Warrant. In the event this Agreement is terminated prior to each such anniversary date, then the Company shall pay to Minicozzi a pro-rated amount of the Renewal Fee for such year.

 

 

 

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2.4           Optional Conversion to Series B Preferred Shares. In lieu of a cash payment in respect of the Collateral Support Fee (defined below), Minicozzi may elect, by providing the Company with written notice within three days after the Additional Collateral Release Date, to convert some or all of the Collateral Support Fee then due and payable (if any) by the Company to Minicozzi into a number of the Company's Series B Preferred Shares at a price per share equal to the Series B Original Issue Price (as defined in the Company's Third Amended and Restated Operating Agreement, dated May 26, 2015 (the "Operating Agreement")). As of the date hereof, the Series B Original Issue Price is $1.0435 per Series B Preferred Share. As used herein, "Collateral Support Fee" means an amount equal to the Initial Fee plus the Renewal Fee.

 

2.5           Release of Additional Collateral. Minicozzi acknowledges and agrees that the Company may refinance the BOTW Loan or take any other actions it deems reasonable to release Minicozzi' s obligations to the Lender in respect of the Additional Collateral at any time; provided that such actions provide for the payment in full of the Collateral Support Fee and any other amounts payable hereunder and the full release of the Minicozzi Deposit as collateral under the BOTW Loan.

 

2.6           Additional Collateral Release Date. As used herein, "Additional Collateral Release Date" means the earliest of: (i) the date the Minicozzi Deposit Account and the Additional Collateral Amount are no longer "Collateral" under the Loan Documents, (ii) a date mutually agreed by the Company and Minicozzi and (iii) a date mutually agreed by the Company and Minicozzi; provided, however, in the event that the Additional Collateral Release Date is a date prior to the nine month anniversary of the date hereof, then, unless otherwise approved by Minicozzi in his sole discretion, the Collateral Support Fee shall be paid on the nine month anniversary of the date hereof.

 

2.7           Reimbursement of Costs. All out of pocket costs and expenses, includin'g reasonable attorneys' fees, incurred or paid by Minicozzi (i) in exercising any right, power or remedy conferred by this Agreement or in the enforcement thereof, or (ii) to Lender in accordance with the terms of the Additional Collateral Documents (including pursuant to any indemnity obligations of Minicozzi thereunder), or (iii) to Lender in connection with the establishment of the Minicozzi Deposit Account, or (iv) in connection with the CBB Agreements (defined below), or (v) legal fees associated with the negotiation and review of the aforementioned documents, shall become a part of the obligations secured hereunder and shall be paid to Minicozzi by Company promptly upon demand.

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company hereby represents and warrants to Minicozzi as of the date hereof that:

 

3.1           Organization, Good Standing and Qualification. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Colorado. The Company has the requisite limited liability company power to own and operate its properties and assets and to carry on its business as now conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not materially and adversely affect the Company or its business.

 

3.2           Limited Liability Company Power. The Company has all requisite limited liability company power to execute and deliver this Agreement and to issue the Warrant, and to carry out and perform its obligations under the terms of the Minicozzi Agreements. The Company's Board of Directors (the "Board") has approved the Minicozzi Agreements based upon a reasonable belief that the BOTW Loan and issuance of the Warrant is appropriate for the Company after reasonable inquiry concerning the Company's capital requirements.

 

 

 

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3.3           Authorization. All limited liability company action on the part of the Company, the Board and its shareholders necessary for the authorization, execution and delivery of this Agreement by the Company and the performance of the Company's obligations hereunder, including the issuance and delivery of the Warrant and the reservation of the equity securities issuable upon the exercise of the Warrant (the "Conversion Securities"), has been taken or will be taken prior to the issuance of such Conversion Securities. The Minicozzi Agreements, when executed and delivered by the Company, shall constitute valid and binding obligations of the Company enforceable in accordance with their terms, subject to Jaws of general application relating to bankruptcy, insolvency, the relief of debtors and, with respect to rights to indemnity, subject to federal and state securities laws. The Conversion Securities, when issued in compliance with the provisions of the applicable Minicozzi Agreements, will be validly issued, fully paid and nonassessable and free of any liens or encumbrances and issued in compliance with all applicable federal and securities laws. The execution and delivery of the Minicozzi Agreements do not, and the consummation of the transactions contemplated thereby will not, conflict with, or result in any violation of default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under the Company's organizational documents, the BOTW Loan, any other agreements with Lender or any other material agreement of the Company.

 

3.4           Compliance with Securities Laws. Assuming the accuracy of the representations and warranties of Minicozzi contained in Section 4 hereof, and subject to completion of any required filings, the Warrant and the Conversion Securities (collectively, the "Securities") will be issued in compliance with all applicable federal and state securities laws.

 

4. REPRESENTATIONS AND WARRANTIES OF MINICOZZI

 

Minicozzi hereby represents and warrants to the Company as follows:

 

4.1           Purchase for Own Account. Minicozzi is acquiring the Warrant and the Note (if issued) solely for his own account and beneficial interest for investment and not for sale or with a view to distribution of the Securities or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention.

 

4.2           Information and Sophistication. Without lessening or obviating the representations and warranties of the Company set forth in Section 3, Minicozzi hereby: (a) acknowledges that he has received all the information he has requested from the Company and considers necessary or appropriate for deciding whether to enter into the Additional Collateral Documents, the Minicozzi Agreements and to acquire the Securities, (b) represents that he has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Additional Collateral Documents, the Minicozzi Agreements and the offering of the Securities and to obtain any additional information necessary to verify the accuracy of the information given or made available to Minicozzi and (c) further represents that he has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risk of these transactions.

 

4.3           Ability to Bear Economic Risk. Minicozzi acknowledges that entering into the Additional Collateral Documents, the Minicozzi Agreements and purchasing the Securities involves a high degree of risk, and represents that he is able, without materially impairing his financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of its investment.

 

4.4           Further Limitations on Disposition. Without in any way limiting the representations set forth above, Minicozzi further agrees not to make any disposition of all or any portion of any of the Securities unless and until:

 

 

 

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(a)            There is then in effect a valid registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act") covering such proposed disposition and such disposition is made in accordance with such registration statement; or

 

(b)            Minicozzi shall have notified the Company in writing of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, Minicozzi shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration under the Act or any applicable state securities laws, provided that no such opinion shall be required for dispositions in compliance with Rule 144 of the Securities Act, except in unusual circumstances.

 

Notwithstanding the provisions of Section 4.4(a) and (hl above, no such registration statement or opinion of counsel shall be necessary for a transfer by gift, will or intestate succession to any spouse or lineal descendants or ancestors of Minicozzi, in each case if and only if each such transferee agrees in writing to be subject to the terms and conditions hereof to the same extent as Minicozzi hereunder.

 

4.5           Accredited Investor Status. Minicozzi is an "accredited investor" as such term is defined in Rule 50I under the Securities Act.

 

4.6           Legends. Minicozzi understands and agrees that all certificates evidencing any of Conversion Securities may bear one or all of the following legends:

 

(a)            "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."

 

(b)            Any legend set forth in, or required by, the Operating Agreement.

 

(c)           Any legend required by the securities laws of any state to the extent such laws are applicable to the Conversion Securities represented by the certificate, instrument, or book entry so legended.

 

5. AFFIRMATIVE COVENANTS.

 

5.1           Further Assurances. At any time and from time to time each of the Company and Minicozzi shall execute and deliver such further instruments and take such further action as may reasonably be requested by the other party to effect the purposes of this Agreement. The Company shall promptly and, in any event within 24 hours of the occurrence thereof, provide Minicozzi with written notice of any failure to timely pay amounts due under the Loan Documents or any other Event of Default thereunder.

 

5.2           Maintenance of Minicozzi Deposit Account. Minicozzi shall, at all times from the date hereof until the Additional Collateral Release Date, maintain a cash balance in immediately available funds of at least $2,000,000 in the Minicozzi Deposit Account such that the Lender can exercise any and all rights in respect of the Additional Collateral Amount pursuant to the Additional Collateral Documents.

 

 

 

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5.3          "Market Stand-Off'' Agreement. Minicozzi hereby agrees that he will not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Common Shares (as defined in the Operating Agreement) (or other securities) of the Company held by him (other than those included in the registration) during the 180-day period following the effective date of the Company's first firm commitment underwritten public offering of its Common Shares registered under the Securities Act (or such longer period as the underwriters or the Company shall request in order to facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule or regulation), provided, that, all executive officers and directors of the Company are bound by and have entered into similar agreements. Minicozzi agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriters that are consistent with his obligations under this Section 5.3 or that are necessary to give further effect to this Section 5.3. In addition, if requested by the Company or the representative of the underwriters of securities of the Company, Minicozzi shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 5.3 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future.

 

5.4          Additional Indebtedness. From and after the date hereof, the Company shall not, without the prior written consent of Minicozzi, incur any additional indebtedness from any bank, institutional lender or otherwise in excess of $100,000 after the date hereof unless, in connection with such incurrence of indebtedness the Collateral Support Fee and all other amounts required to be paid in connection herewith are paid in full and all collateral obligations regarding the Minicozzi Deposit Account are released; provided, however, that the foregoing shall not prevent the Company from issuing and selling unsecured convertible promissory notes after the date hereof so long as such notes are specifically subordinated to the obligations under this Agreement and the Note (if issued).

 

6.             NEGATIVE COVENANTS. Company shall not, (a) without the prior written consent of Minicozzi, (i) incur any indebtedness from Lender in excess of $6,000,000; (ii) create, incur, assume or suffer to exist any lien or encumbrance with respect to any of its property, except for the financing of equipment in the ordinary course of business; or (b) without at least ten (10) days prior written notice to Minicozzi, relocate its chief executive office or state of formation or change its legal name or experience any change in corporate form.

 

7. MISCELLANEOUS

 

7.1           Binding Agreement. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, expressed or implied, is intended to confer upon any third party any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

 

7.2           Governing Law. This Agreement shall be governed by and construed under the laws of the State of Colorado as applied to agreements among Colorado residents, made and to be performed entirely within the State of Colorado, without giving effect to conflicts of laws principles.

 

7.3           Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

7.4          Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

 

 

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7.5          Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address, email address or facsimile number on the signature page below, and to Minicozzi at his address, email address or facsimile number set forth on his signature page below or at such other addresses as the Company or Minicozzi may designate by 10 days' advance written notice to the other parties hereto.

 

7.6           Modification; Waiver. A modification or waiver of such provisions of this Agreement or consent to departure therefrom shall be effective only upon the written consent of the Company and Minicozzi; provided. however, that any provision hereof may be waived by any waiving party on such party's own behalf, without the consent of any other party.

 

7.7           Expenses. The Company shall pay the expenses and legal fees incurred by each of the Company and Minicozzi with respect to this Agreement and the transactions contemplated herein, including, without limitation, any payment or reimbursement obligations of Minicozzi under the Additional Collateral Documents.

 

7.8           Effectiveness; Termination of Existing Agreements. This Agreement represents the entire agreement with respect to the subject matter hereof, is effective upon the execution by the parties hereto and the repayment of the Existing Loan, and supersedes all prior negotiations, agreements and commitments, including that certain Collateral and Security Agreement dated as of March 30, 2017 (which was entered into by and between Company and Minicozzi in connection with the Existing Loan), and any promissory notes or other documents, instruments or agreements with respect to any indebtedness, collateral or security interest entered into in connection therewith (collectively, the "CBB Agreements"). The parties acknowledge and agree that, upon the effectiveness of this Agreement and payoff of the Existing Loan and release of all collateral securing the Existing Loan, the CBB Agreements and all rights and obligations therein are hereby terminated and of no further force or effect, and, without limiting the foregoing, any payment obligations thereunder shall be deemed fully paid and satisfied.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

 

 

 

CLIP INTERACTIVE, LLC

   
   
  By:
   
  Name: Michael Lawless
   
  Title: CEO
   
   
  /s/ Richard Michael Minicozzi
  RICHARD MICHAEL MINICOZZI
   
   
  /s/ Janina Y. Minicozzi
  JANINA Y. MINICOZZI
   

 

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

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EXHIBIT A

 

FORM OF NOTE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SECURED PROMISSORY NOTE

 

Principal Amount:$[•) [DATE] Boulder, CO

 

 

FOR VALUE RECEIVED, Clip Interactive, LLC, a Colorado limited liability company, ("Borrower"), hereby promises to pay to the order of Rick Minicozzi and Janina Minicozzi (together, "Holder"), in lawful money of the United States of America and in immediately available funds, the principal sum of [•] (the "Loan") together with accrued and unpaid interest thereon, each due and payable on the dates and in the manner set forth below. Such amount shall be in addition to any amounts owed with respect to the Collateral Support Fee (as defined and set forth in that certain Collateral and Security Agreement, dated as of April , 2018, by and between Holder and Borrower (the "Collateral and Security Agreement").

 

1.             Repayment Unless earlier paid in accordance with Section 4 below, the outstanding principal amount of the Loan and all accrued but unpaid interest thereon shall be due and payable upon the written demand of Holder delivered to Borrower at least 5 business days before the desired date of repayment (the date on which such payment is to be made pursuant to such demand, the "Repayment Date"). Accrued interest under this Note shall be paid to Holder, in arrears, on the first day of each month following the date such Loan is made. All payments on this Note shall be in lawful money of the United States of America.

 

2.             Interest Rate. Borrower promises to pay simple interest on the outstanding principal amount from the date hereof until payment in full, which interest shall be payable at the rate of 33.0% per annum or the maximum rate permissible by law, whichever is less. It is the intention of Borrower and Holder to strictly comply with applicable usury laws. Accordingly , notwithstanding any provision of the Collateral and Security Agreement or the Note (in each case as such documents may be amended from time to time (collectively, the "Minicozzi Agreements") to the contrary, in no event shall the Minicozzi Agreements require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceeds the maximum amount permitted by any such applicable laws, as the same may be amended or modified from time to time. Borrower and Holder agree and acknowledge that the amounts payable under the Minicozzi Agreements comply with applicable Colorado usury laws and Borrower agrees not to make and hereby waives any right that it has to pursue, any claim or defense of usury in connection with the Minicozzi Agreements, and shall indemnify Holder against any losses that Holder incurs as a result of a claim or defense of usury brought against Minicozzi (including for reasonable attorney's fees).

 

3.             Application of Payments. All payments on this Note shall be applied first to accrued interest, if any, and thereafter to the outstanding principal balance hereof.

 

4.             Prepayment. Borrower may voluntarily prepay this Note at any time without the consent of Holder.

 

5.            Default Each of the following events shall be an " Event of Default" hereunder:

 

5.1            Borrower fails to pay timely any of the principal amount due under this Note or any accrued interest or other amounts due under this Note on the Repayment Date;

 

5.2           Borrower files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors or takes any corporate action in furtherance of any of the foregoing;

 

5.3          An involuntary petition is filed against Borrower (unless such petition is dismissed or discharged within sixty (60) days) under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Borrower; or

 

5.4           Upon the occurrence of an Event of Default under Section 5.2 or Section 5.3), this Note shall accelerate and all principal and unpaid accrued interest shall become due and payable and Holder will have all remedies available under the Colorado Uniform Commercial Code with respect to Holder's security interest in Borrower's assets, including, without limitation, foreclosure and sale of such assets.

 

 

 

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6.             Certain Waivers. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys' fees, costs and other expenses. The right to plead any and all statutes of limitations as a defense to any demands hereunder is hereby waived to the full extent permitted by law.

 

7.             Modification. No term or provision of this Note may be amended or waived without the written consent of Borrower and Holder.

 

8.             Governing Law. This Note shall be governed by and construed under the laws of the State of Colorado, as applied to agreements among Colorado residents, made and to be performed entirely within the State of Colorado, without giving effect to conflicts of laws principles.

 

9.             Assignment. This Note may be transferred by Holder only upon its surrender to Borrower for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to Borrower. Thereupon, this Note shall be reissued to, and registered in the name of, the transferee, or a new note for like principal amount and interest shall be issued to, and registered in the name of, the transferee. Interest and principal shall be paid solely to the registered holder of this Note. Such payment shall constitute full discharge of Borrower's obligation to pay such interest and principal.

 

10.          Secured Promissory Note. This Note is secured by all of the Borrower's assets as set forth in Collateral and Security Agreement.

 

11.          Senior Indebtedness. The indebtedness evidenced by this Note and Holder's right to receive payment hereunder is subordinate to the senior and prior payment in full of all amounts owing by Borrower to Bank of the West.

 

12.           Amendment; Waiver. Any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and Holder; provided, however, that any right hereunder may be waived by any waiving party on such party's own behalf, without the consent of any other party.

 

13.          Guaranty. The Company's payment obligations under this Note are guaranteed pursuant to that certain Unconditional Guaranty issued by Jeffery Thramann in favor of Minicozzi on or about the date hereof.

 

 

  BORROWER:
   
  CLIP INTERACTIVE, LLC
   
   
  By :
  Name: Jeff Thramann
  Title: Manager
   
   
  HOLDER:
   
   
  Rick Minicozzi
   
   
  Janina Minicozzi

 

 

 

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EXHIBIT B

FORM OF WARRANT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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UNCONDITIONAL GUARANTY

April _, 2018

 

RECITALS

 

Richard Michael Minicozzi and Janina Y. Minicozzi (together, "Minicozzi") and Clip Interactive, LLC, a Colorado limited liability company ("Company") are parties to that certain Collateral and Security Agreement dated as of April_, 2018 (the "Agreement") (attached hereto as EXHIBIT A) with respect to certain cash collateral provided by Minicozzi in support of a loan facility provided by Bank of the West ("Lender") to Company. Pursuant to the terms of the Agreement, Company shall issue a promissory note to Minicozzi (the "Note") as evidence of Company's obligation to repay Minicozzi the amount of cash collateral applied by Lender to repay such loans. This Unconditional Guaranty shall be issued and effective upon the execution and delivery of the Agreement by the parties thereto. Jeffrey J. Thramann ("Guarantor") has agreed to guaranty the Company's obligations under the Note issued pursuant to the Agreement. All terms used without definition in this Guaranty shall have the meaning assigned to them in the Agreement.

 

1.             Guarantor hereby unconditionally and irrevocably guarantees the prompt and complete payment of all amounts that Company owes to Minicozzi under the Note in strict accordance with its terms. If Company does not pay any amount owing to Minicozzi under the Note, Guarantor shall immediately pay all amounts due to Minicozzi under the Note.

 

2.              Until all of the amounts that Company owes to Minicozzi under the Note have been paid in full, Guarantor shall have no right of subrogation or reimbursement, contribution or other rights against Company, and Guarantor waives any right to enforce any remedy that Minicozzi now has or may hereafter have against Company.

 

3.              Any indebtedness of Company now or hereafter held by Guarantor is hereby subordinated to the repayment of obligations under the Note owing by Company to Minicozzi; and such indebtedness of Company to Guarantor shall be collected, enforced and received by Guarantor as trustee for Minicozzi and be paid over to Minicozzi on account of the indebtedness of Company to Minicozzi but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Guarantor subordinates to Minicozzi any security interests, liens or encumbrances now or hereafter securing Company's personal property (including accounts receivable), and all right, title, security interest, and other interest that Guarantor may have or hereafter acquire in and to Company's personal property. The security interest of Minicozzi in Company's personal property (including accounts receivable) shall be and remain at all times a security interest prior and superior to the security interest of Guarantor in Company's personal property.

 

4.              Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional indebtedness.

 

5.              If Company becomes insolvent or is adjudicated bankrupt or files a petition for reorganization, arrangement, composition or similar relief under any present or future provision of the United States Bankruptcy Code, or if such a petition is filed against Company, and in any such proceeding some or all of any indebtedness or obligations under the Note are terminated or rejected or any obligation of Company is modified or abrogated, or if Company's obligations are otherwise avoided for any reason, Guarantor agrees that Guarantor's liability hereunder shall not thereby be affected or I modified and such liability shall continue in full force and effect as if no such action or proceeding had I occurred. This Guaranty shall continue to be effective or be reinstated, as the case may be, if any payment must be returned by Minicozzi upon the insolvency, bankruptcy or reorganization of Company, Guarantor, any other guarantor, or otherwise, as though such payment had not been made.

 

6.             No terms or provisions of this Guaranty may be changed, waived, revoked or amended without Guarantor's and Minicozzi's prior written consent. Should any provision of this Guaranty be determined by a court of competent jurisdiction to be unenforceable, all of the other provisions shall remain effective.

 

7.              This Guaranty embodies the entire agreement among the parties hereto with respect to the matters set forth herein, and supersedes all prior Note among the parties with respect to the matters set forth herein. No course of prior dealing among the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement, modify or vary any of the terms hereof. There are no conditions to the full effectiveness of this Guaranty.

 

 

 

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8.              Minicozzi may assign this Guaranty without in any way affecting Guarantor's liability under it. This Guaranty is binding upon Guarantor and Guarantor's successors and assigns. This Guaranty shall inure to the benefit of Minicozzi and its successors and assigns.

 

9.              Guarantor represents and warrants to Minicozzi that (i) Guarantor has taken all necessary and appropriate action to authorize the execution, delivery and performance of this Guaranty, and (ii) this Guaranty constitutes a valid and binding obligation, enforceable against Guarantor in accordance with its terms.

 

10.           This Guaranty shall be governed by and construed under the laws of the State of Colorado as applied to agreements among Colorado residents, made and to be performed entirely within the State of Colorado, without giving effect to conflicts of laws principles.

 

11.           In the event that any signature to this Guaranty is delivered by facsimile transmission or by e-mail delivery of a ".pdf' format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or ".pdf' signature page were an original hereof.

 

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IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of the date set forth above.

 

  Guarantor:

   
   
   
  Jeffrey J. Thramann
   
   
  Address:
   
   
   
   
   
   
Acknowledged:  
   
   
Richard M. Minicozzi  
   
   
Janina Y. Minicozzi  
   
   
Address:  
   
   
   
   
   
   
   
CLIP INTERACTIVE, LLC  
   
   
   
By:  
Name: Michael Lawless  
Title: Chief Executive Officer  

 

 

 

 

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EXHIBIT A

 

COLLATERAL AND SECURITY AGREEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

CLIP INTERACTIVE, LLC

 

WARRANT TO PURCHASE LIMITED LIABILITY COMPANY SHARES

 

WC-2018-1 APRIL [5], 2018

 

 

Void After April 5, 2023

 

THIS WARRANT TO PURCHASE LIMITED LIABILITY COMPANY SHARES CERTIFIES THAT, for value received, Rick Minicozzi and Janina Y. Minicozzi, or their assigns (together, the "Holder"), is entitled to subscribe for and purchase at the Exercise Price (defined below) from Clip Interactive, LLC, a Colorado limited liability company, with its principal office at 3100 Carbon Place, Suite 102, Boulder, CO 80301 (together with its successors, the "Company")up to Three Hundred Thousand (300,000) Exercise Shares (as defined below and subject to adjustments as described below).

 

1.              Definitions. As used herein, the following terms shall have the following respective meanings:

 

(a)            "Exercise Period" shall mean the period commencing with the date hereof and ending five years from the date hereof, unless sooner terminated as provided below.

 

(b)           "Exercise Price" shall mean $0.01 per share, subject to adjustment pursuant to Section 5 below.

 

(c)           "Exercise Shares" shall mean the Series 1 Common Shares of the Company (the "Shares"), as defined in the Company's limited liability company operating agreement as in effect as of the date hereof (the "Operating Agreement"), issuable upon exercise of this Warrant to Purchase Limited Liability Company Shares (this "Warrant").

 

2.         Exercise of Warrant. The rights represented by this Warrant may be exercised in whole or in part at any time during the Exercise Period, by delivery of the following to the Company at its address set forth above (or at such other address as it may designate by notice in writing to the Holder):

 

(a)           An executed Notice of Exercise in the form attached hereto;

 

(b)           Payment of the Exercise Price either (i) in cash or by check, or (ii) by cancellation of indebtedness; and

 

(c)           This Warrant.

 

Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or persons affiliated with the Holder, if the Holder so designates, shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised.

 

 

 

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The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the share transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the share transfer books are open.

 

2.1           Net Exercise. Notwithstanding any provisions herein to the contrary, if the fair market value of one of the Shares is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment of cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise in which event the Company shall issue to the Holder a number of Shares computed using the following formula:

 

     

X = Y (A-B)

            A

       
  Where X =   the number of Shares to be issued to the Holder
       
Y =   the number of Shares purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation)
       
A =   the fair market value of one Share of the Company (at the date of such calculation)
       
B =   Exercise Price (as adjusted to the date of such calculation)

 

For purposes of the above calculation, the fair market value of one Share shall be determined by the Company's Board of Directors or similar governing body in good faith but shall in no event be less than the then-current liquidation value thereof; provided, however, that in the event the Company makes an initial public offering of its Shares the fair market value per share shall mean: (i) if the Warrant is being converted in connection with and contingent upon a public offering of the Shares, and if the Company's registration statement relating to such public offering has been declared effective by the U.S. Securities and Exchange Commission, then the initial "Price to Public" specified in the final prospectus with respect to such offering; or (ii) if the Warrant is not being converted in connection with and contingent upon a public offering of the Company's securities, then as follows: (x) if traded on a securities exchange or the NASDAQ National Market, the fair market value of the Shares shall be deemed to be the average of the closing or last reported sale prices of the Shares on such exchange or market over the 30-day period ending five business days prior to the date of calculation, or (y) if otherwise traded in an over-the-counter market, fair market value of the Shares shall be deemed to be the average of the closing bid and ask prices of the Shares over the 30-day period ending five business days prior to the date of calculation.

 

2.2           Capital Account. Upon the exercise of this Warrant, the Company shall cause a capital account for the Holder to be established and maintained in accordance with the Operating Agreement.

 

3.             Covenants of the Company.

 

3.1           Covenants as to Exercise Shares. The Company covenants and agrees that all Exercise Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued and outstanding, and free from all taxes, liens and charges with respect to the issuance thereof.

 

 

 

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3.2           Notices of Record Date. In the event of any taking by the Company of a record of the holders of Shares for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the Company shall mail to the Holder, at least ten (10) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.

 

3.3           No Impairment. The Company shall not, by amendment of its Operating Agreement or other organic document or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment.

 

4.              Representations of Holder.

 

4.1           Acquisition of Warrant for Personal Account. The Holder represents and warrants that it is acquiring the Warrant solely for its account for investment and not with a view to or for sale or distribution of said Warrant or any part thereof. The Holder also represents that the entire legal and beneficial interests of the Warrant and Exercise Shares the Holder is acquiring is being acquired for, and will be held for, its account only.

 

4.2           Securities Are Not Registered.

 

(a)           The Holder understands that the Warrant and the Exercise Shares have not been registered under the Securities Act of 1933, as amended (the "Act") on the basis that no distribution or public offering of the stock of the Company is to be effected. The Holder realizes that the basis for the exemption may not be present if, notwithstanding its representations, the Holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The Holder has no such present intention.

 

(b)          The Holder recognizes that the Warrant and the Exercise Shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. The Holder recognizes that the Company has no obligation to register the Warrant or the Exercise Shares, or to comply with any exemption from such registration.

 

(c)           The Holder is aware that neither the Warrant nor the Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale following the required holding period under Rule 144 and the number of shares being sold during specified periods not exceeding specified limitations. Holder is aware that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company presently has no plans to satisfy these conditions in the foreseeable future.

 

4.3           Disposition of Warrant and Exercise Shares.

 

(a)           The Holder further agrees not to make any disposition of all or any part of the Warrant or Exercise Shares in any event unless and until:

 

(i)                 The Company shall have received a letter secured by the Holder from the Securities and Exchange Commission stating that no action will be recommended to the Commission with respect to the proposed disposition;

 

(ii)                There is then in effect a registration statement under the Act covermg such proposed disposition and such disposition is made in accordance with said registration statement; or

 

 

 

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(iii)               The Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, the Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, for the Holder to the effect that such disposition will not require registration of such Warrant or Exercise Shares under the Act or any applicable state securities laws.

 

(b)           The Holder understands and agrees that in the event certificates evidencing the shares are issued to the Holder, such certificates may bear the following or a similar legend:

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

 

5.                   Adjustment of Exercise Price. In the event of changes in the outstanding equity interests of the Company by reason of stock dividends, split-ups, recapitalizations, reclassifications, combinations or exchanges of equity interests, separations, reorganizations, liquidations, or the like, the number of equity interests available under the Warrant in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder of the Warrant, on exercise for the same aggregate Exercise Price, the total number, class, and kind of equity interests as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such equity interests until after the event requiring adjustment. The form of this Warrant need not be changed because of any adjustment in the number of Exercise Shares subject to this Warrant.

 

6.                  Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Exercise Shares (including fractions) issuable upon exercise of this Warrant may be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Company shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of an Exercise Share by such fraction.

 

7.                   Early Termination. In the event of, at any time during the Exercise Period, an initial public offering of securities of the Company registered under the Act; or any capital reorganization, or any reclassification of the capital stock or equity of the Company (other than a change in par value or from par value to no par value or no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares); or any consolidation or merger of the Company with or into any other entity or person or any other reorganization, in which the equity holders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company's voting power immediately after such consolidation, merger or reorganization; or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company's voting power is sold or otherwise transferred (excluding any consolidation or merger effected exclusively to change the domicile of the Company); or any sale, lease, exclusive license or other disposition of all or substantially all of the assets of the Company; or any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall provide to the Holder ten (10) days advance written notice of such event, and this Warrant shall terminate unless exercised prior to the date such public offering is closed or the occurrence of such other event.

 

8.      Market Stand-Off Agreement. Holder shall not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Shares (or other securities) of the Company held by Holder, for a period of time specified by the managing underwriter(s) (not to exceed one hundred eighty (180 days) following the effective date of a registration statement of the Company filed under the Act in connection with the Company's initial public offering. Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company and/or the managing underwriter(s) which are consistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to such Shares (or other securities) until the end of such period. The underwriters of the Company's Shares are intended third party beneficiaries of this Section 8 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.

 

 

 

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9.                   No Voting Rights. This Warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a member of the Company.

 

10.               Transfer of Warrant. Subject to applicable laws, the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

11.               Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.

 

12.               Notices, etc. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex, electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at 3100 Carbon Place, Suite 102, Boulder, CO 80301, and to the Holder at the address(es) set forth on the books and records of the Company or at such other address(es) as the Company or the Holder may designate by ten (10) days advance written notice to the other parties hereto.

 

13.               Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.

 

14.               Governing Law. This Warrant and all rights, obligations and liabilities hereunder shall be governed by the laws of the State of Colorado.

 

15.               Other Agreements. Upon exercise of this Warrant, Holder agrees that it shall execute a counterpart signature page and become party as a member or shareholder to the Operating Agreement and any other agreements governing the rights and obligations of holders of Equity Securities, in each case, as in effect as of the date of such exercise.

 

16.              Amendment and Waiver. Any term of this Warrant may be amended or waived with the written consent of the Company and the Holder.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

 

 

 

 

 

 

 

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer as of April [5], 2018.

 

 

 

CLIP INTERACTIVE, LLC

   
   
  By:
   
  Name: Michael Lawless
   
  Title: CEO
   
   
  /s/ Richard Michael Minicozzi
  RICHARD MICHAEL MINICOZZI
   
   
  /s/ Janina Y. Minicozzi
  JANINA Y. MINICOZZI
   

 

 

 

 

 

 

 

 

 

 

 

 

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NOTICE OF EXERCISE

 

TO: Clip Interactive, LLC

 

 

(1)      ☐#61608;        The undersigned hereby elects to purchase _________ Series 1 Common Shares (the "Shares") of Clip Interactive, LLC (the "Company") pursuant to the terms of the attached Warrant to Purchase Limited Liability Company Shares (the "Warrant"), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

           ☐        The undersigned hereby elects to purchase _________ Series 1 Common Shares (the "Shares") of Clip Interactive, LLC (the "Company") pursuant to the terms of the net exercise provisions set forth in Section 2.1 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2)       Please issue a certificate or certificates representing said Shares in the name of the undersigned or in such other name as is specified below:

 

(3)       The undersigned represents that (i) the aforesaid Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such Shares; (ii) the undersigned is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned's own interests; (iv) the undersigned understands that the Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the period of time prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said registration statement, or the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

     

(Date)

 

(Signature)

     
     
    (Print name)

 

 

 

 

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ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form
and supply required information. Do not use this form

to purchase shares.)

 

 

For Value Received, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:    
    (Please Print)
     
Address:    
    (Please Print)
     
Dated:   ___________, 20__
     
     

Holder’s

Signature:

 

 

_____________________________________________________________

     
     

Holder’s

Address:

 

 

_____________________________________________________________

 

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of companies and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 

 

 

 

 

 

 

 

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Exhibit 10.6

 

[Form of Convertible Promissory Note]

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATES IN THE UNITED STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

 

CONVERTIBLE PROMISSORY NOTE

 

Note Series: 2019A
   
Date of Note:  
   
Principal Amount of Note: $

 

For value received Clip Interactive, LLC, a Colorado limited liability company (the “Company”), promises to pay to the undersigned holder or such party’s assigns (the “Holder”) the principal amount set forth above with interest on the outstanding principal amount at the rate of 6% per annum, compounded annually. Interest shall commence with the date hereof and shall continue on the outstanding principal amount until paid in full or converted. Interest shall be computed on the basis of a year of 365 days for the actual number of days elapsed. All unpaid interest and principal shall be due and payable upon request of the Majority Holders on or after March 31, 2020 (the “Maturity Date”).

 

1.             Basic Terms.

 

(a)              Series of Notes. This convertible promissory note (the “Note”) is issued as part of a series of substantially similar notes designated by the Note Series above (collectively, the “Notes”), and having an aggregate principal amount not to exceed $2,000,000 and issued in a series of multiple closings to certain persons and entities (collectively, the “Holders”). The Company shall maintain a ledger of all Holders.

 

(b)               Payments. All payments of interest and principal shall be in lawful money of the United States of America and shall be made pro rata among all Holders. All payments shall be applied first to accrued interest, and thereafter to principal.

 

(c)                Prepayment. Except as provided in this Section 1(c), the Company may not prepay this Note prior to the Maturity Date without the consent of the Holders of a majority of the outstanding principal amount of the Notes (the “Majority Holders”). The Company may prepay this Note prior to the Maturity Date upon 30 days prior written notice to the Holders at a cash amount equal to (i) the outstanding principal amount of this Note plus any unpaid accrued interest on the original principal, plus (ii) a repayment premium equal to 10% of the outstanding principal amount of this Note. Prior to such prepayment date, the Holder of this Note shall have the right to convert this Note on the terms set forth in Section 2(c) below (i.e. Maturity Date Conversion). Any such conversion must be in writing and shall be delivered to the Company prior to the prepayment date set forth in the Company’s prepayment notice.

 

 

 

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2.             Conversion and Repayment.

 

(a)               Conversion upon a Qualified Financing. In the event that the Company issues and sells shares of its equity securities ( “Equity Securities”) to investors (the “Investors”) on or before the Maturity Date in an equity financing with total proceeds to the Company of not less than $4,000,000 (excluding the conversion of the Notes or other convertible securities issued for capital raising purposes (e.g., Simple Agreements for Future Equity)) (a “Qualified Financing”), then the outstanding principal amount of this Note and any unpaid accrued interest shall automatically convert in whole without any further action by the Holder into Equity Securities sold in the Qualified Financing at a conversion price equal to the cash price paid per share for Equity Securities by the Investors in the Qualified Financing multiplied by 0.70. The issuance of Equity Securities pursuant to the conversion of this Note shall be upon and subject to the same terms and conditions applicable to Equity Securities sold in the Qualified Financing. Notwithstanding this paragraph, if the conversion price of the Notes as determined pursuant to this paragraph (the “Conversion Price”) is less than the price per share at which Equity Securities are issued in the Qualified Financing, the Company may, solely at its option, elect to convert this Note into shares of a newly created series of preferred stock having the identical rights, privileges, preferences and restrictions as the Equity Securities issued in the Qualified Financing, and otherwise on the same terms and conditions, other than with respect to (if applicable): (i) the per share liquidation preference and the conversion price for purposes of price-based anti-dilution protection, which will equal the Conversion Price; and (ii) the per share dividend, which will be the same percentage of the Conversion Price as applied to determine the per share dividends of the Investors in the Qualified Financing relative to the purchase price paid by the Investors. For the avoidance of doubt, the Equity Securities sold in a Qualified Financing and into which this Note shall be automatically converted shall include shares of common stock of any corporation or other successor entity into which the Company may be converted in connection with a transaction constituting a Qualified Financing.

 

(b)               Optional Conversion at non-Qualified Financing. In the event the Company consummates, on or before the Maturity Date, an equity financing pursuant to which it sells shares of Preferred Stock in a transaction that does not constitute a Qualified Financing but which results in total proceeds to the Company of not less than $1,000,000 (excluding the conversion of the Notes or other convertible securities issued for capital raising purposes (e.g., Simple Agreements for Future Equity)), then the Majority Holders shall have the option to treat such equity financing as a Qualified Financing on the same terms set forth herein.

 

(c)                Maturity Date Conversion. In the event that this Note remains outstanding on the Maturity Date, then the outstanding principal balance of this Note and any unpaid accrued interest shall upon the election of the Majority Holders given prior to the Maturity Date, convert as of the Maturity Date into shares of the Company’s Common Stock at a conversion price equal to the quotient resulting from dividing $40,000,000 by the number of outstanding shares of Common Stock of the Company as of the Maturity Date (assuming conversion of all securities convertible into Common Stock and exercise of all outstanding options and warrants, including all shares of Common Stock reserved and available for future grant under any equity incentive or similar plan of the Company, but excluding the shares of equity securities of the Company issuable upon the conversion of Notes or other convertible securities issued for capital raising purposes (e.g., Simple Agreements for Future Equity)).

 

(d)               Change of Control. If the Company consummates a Change of Control (as defined below) while this Note remains outstanding, the Company shall repay the Holder in cash in an amount equal to (i) the outstanding principal amount of this Note plus any unpaid accrued interest on the original principal, plus (ii) a repayment premium equal to 30% of the outstanding principal amount of this Note. For purposes of this Note, a “Change of Control” means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company’s voting power is transferred; or (iii) the sale or transfer of all or substantially all of the Company’s assets, or the exclusive license of all or substantially all of the Company’s material intellectual property; provided that a Change of Control shall not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor, indebtedness of the Company is cancelled or converted or a combination thereof. The Company shall give the Holder notice of a Change of Control not less than 10 days prior to the anticipated date of consummation of the Change of Control. Any repayment pursuant to this paragraph in connection with a Change of Control shall be subject to any required tax withholdings, and may be made by the Company (or any party to such Change of Control or its agent) following the Change of Control in connection with payment procedures established in connection with such Change of Control.

 

 

 

  2  

 

 

(e)              Procedure for Conversion. In connection with any conversion of this Note into capital stock, the Holder shall surrender this Note to the Company and deliver to the Company any documentation reasonably required by the Company (including, in the case of a Qualified Financing, all financing documents executed by the Investors in connection with such Qualified Financing).  The Company shall not be required to issue or deliver the capital stock into which this Note may convert until the Holder has surrendered this Note to the Company and delivered to the Company any such documentation.  Upon the conversion of this Note into capital stock pursuant to the terms hereof, in lieu of any fractional shares to which the Holder would otherwise be entitled, the Company shall pay the Holder cash equal to such fraction multiplied by the price at which this Note converts.

 

(f)               Interest Accrual. If a Change of Control or Qualified Financing is consummated, all interest on this Note shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the signing of the definitive agreement for the Change of Control or Qualified Financing.

 

3.             Representations and Warranties.

 

(a)               Representations and Warranties of the Company. The Company hereby represents and warrants to the Holder as of the date the first Note was issued as follows:

 

(i)               Organization, Good Standing and Qualification. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Colorado. The Company has the requisite corporate power to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business (a “Material Adverse Effect”).

 

(ii)              Corporate Power. The Company has all requisite corporate or limited liability company power to issue this Note and to carry out and perform its obligations under this Note. The Company’s Board of Directors (the “Board”) has approved the issuance of this Note based upon a reasonable belief that the issuance of this Note is appropriate for the Company after reasonable inquiry concerning the Company’s financing objectives and financial situation.

 

(iii)             Authorization. All corporate or limited liability company action on the part of the Company, the Board and the Company’s stockholders necessary for the issuance and delivery of this Note has been taken. This Note constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency, the relief of debtors and, with respect to rights to indemnity, subject to federal and state securities laws. Any securities issued upon conversion of this Note (the “Conversion Securities”), when issued in compliance with the provisions of this Note, will be validly issued, fully paid, nonassessable, free of any liens or encumbrances and issued in compliance with all applicable federal and securities laws.

 

(iv)             Governmental Consents. All consents, approvals, orders or authorizations of, or registrations, qualifications, designations, declarations or filings with, any governmental authority required on the part of the Company in connection with issuance of this Note has been obtained.

 

(v)               Compliance with Laws. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which violation of which would have a Material Adverse Effect.

 

 

 

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(vi)              Compliance with Other Instruments. The Company is not in violation or default of any term of its limited liability company certificate or operating agreement, or of any provision of any mortgage, indenture or contract to which it is a party and by which it is bound or of any judgment, decree, order or writ, other than such violation(s) that would not have a Material Adverse Effect. The execution, delivery and performance of this Note will not result in any such violation or be in conflict with, or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, decree, order or writ or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. Without limiting the foregoing, the Company has obtained all waivers reasonably necessary with respect to any preemptive rights, rights of first refusal or similar rights, including any notice or offering periods provided for as part of any such rights, in order for the Company to consummate the transactions contemplated hereunder without any third party obtaining any rights to cause the Company to offer or issue any securities of the Company as a result of the consummation of the transactions contemplated hereunder.

 

(vii)            No “Bad Actor” Disqualification. The Company has exercised reasonable care to determine whether any Company Covered Person (as defined below) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii), as modified by Rules 506(d)(2) and (d)(3), under the Act (“Disqualification Events”). To the Company’s knowledge, no Company Covered Person is subject to a Disqualification Event. The Company has complied, to the extent required, with any disclosure obligations under Rule 506(e) under the Act. For purposes of this Note, “Company Covered Persons” are those persons specified in Rule 506(d)(1) under the Act; provided, however, that Company Covered Persons do not include (a) any Holder, or (b) any person or entity that is deemed to be an affiliated issuer of the Company solely as a result of the relationship between the Company and any Holder.

 

(viii)           Offering. Assuming the accuracy of the representations and warranties of the Holder contained in subsection (b) below, the offer, issue, and sale of this Note and the Conversion Securities (collectively, the “Securities”) are and will be exempt from the registration and prospectus delivery requirements of the Act, and have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws.

 

(ix)             Use of Proceeds. The Company shall use the proceeds of this Note solely for the operations of its business, and not for any personal, family or household purpose.

 

(b)               Representations and Warranties of the Holder. The Holder hereby represents and warrants to the Company as of the date hereof as follows:

 

(i)               Purchase for Own Account. The Holder is acquiring the Securities solely for the Holder’s own account and beneficial interest for investment and not for sale or with a view to distribution of the Securities or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention.

 

(ii)              Information and Sophistication. Without lessening or obviating the representations and warranties of the Company set forth in subsection (a) above, the Holder hereby: (A) acknowledges that the Holder has received all the information the Holder has requested from the Company and the Holder considers necessary or appropriate for deciding whether to acquire the Securities, (B) represents that the Holder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and to obtain any additional information necessary to verify the accuracy of the information given the Holder and (C) further represents that the Holder has such knowledge and experience in financial and business matters that the Holder is capable of evaluating the merits and risk of this investment.

 

 

 

  4  

 

 

(iii)             Ability to Bear Economic Risk. The Holder acknowledges that investment in the Securities involves a high degree of risk, and represents that the Holder is able, without materially impairing the Holder’s financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of the Holder’s investment.

 

(iv)             Further Limitations on Disposition. Without in any way limiting the representations set forth above, the Holder further agrees not to make any disposition of all or any portion of the Securities unless and until:

 

(1)               There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

 

(2)               The Holder shall have notified the Company of the proposed disposition and furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, the Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration under the Act or any applicable state securities laws; provided that no such opinion shall be required for dispositions in compliance with Rule 144 under the Act, except in unusual circumstances.

 

(3)               Notwithstanding the provisions of paragraphs (1) and (2) above, no such registration statement or opinion of counsel shall be necessary for a transfer by the Holder to a partner (or retired partner) or member (or retired member) of the Holder in accordance with partnership or limited liability company interests, or transfers by gift, will or intestate succession to any spouse or lineal descendants or ancestors, if all transferees agree in writing to be subject to the terms hereof to the same extent as if they were the Holders hereunder.

 

(v)               Accredited Investor Status. The Holder is an “accredited investor” as such term is defined in Rule 501 under the Act.

 

(vi)              No “Bad Actor” Disqualification. The Holder represents and warrants that neither (A) the Holder nor (B) any entity that controls the Holder or is under the control of, or under common control with, the Holder, is subject to any Disqualification Event, except for Disqualification Events covered by Rule 506(d)(2)(ii) or (iii) or (d)(3) under the Act and disclosed in writing in reasonable detail to the Company. The Holder represents that the Holder has exercised reasonable care to determine the accuracy of the representation made by the Holder in this paragraph, and agrees to notify the Company if the Holder becomes aware of any fact that makes the representation given by the Holder hereunder inaccurate.

 

(vii)            Foreign Investors. If the Holder is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended (the “Code”)), the Holder hereby represents that he, she or it has satisfied itself as to the full observance of the laws of the Holder’s jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Note, including (A) the legal requirements within the Holder’s jurisdiction for the purchase of the Securities, (B) any foreign exchange restrictions applicable to such purchase, (C) any governmental or other consents that may need to be obtained, and (D) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Securities. The Holder’s subscription, payment for and continued beneficial ownership of the Securities will not violate any applicable securities or other laws of the Holder’s jurisdiction.

 

(viii)          Forward-Looking Statements. With respect to any forecasts, projections of results and other forward-looking statements and information provided to the Holder, the Holder acknowledges that such statements were prepared based upon assumptions deemed reasonable by the Company at the time of preparation. There is no assurance that such statements will prove accurate, and the Company has no obligation to update such statements.

 

 

 

  5  

 

 

4.             Events of Default.

 

(a)              If there shall be any Event of Default (as defined below) hereunder, at the option and upon the declaration of the Majority Holders and upon written notice to the Company (which election and notice shall not be required in the case of an Event of Default under subsection (ii) or (iii) below), this Note shall accelerate and all principal and unpaid accrued interest shall become due and payable. The occurrence of any one or more of the following shall constitute an “Event of Default”:

 

(i)               The Company fails to pay timely any of the principal amount due under this Note on the date the same becomes due and payable or any unpaid accrued interest or other amounts due under this Note on the date the same becomes due and payable;

 

(ii)              The Company files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors or takes any corporate action in furtherance of any of the foregoing; or

 

(iii)            An involuntary petition is filed against the Company (unless such petition is dismissed or discharged within 60 days under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee or assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of the Company).

 

(b)               In the event of any Event of Default hereunder, the Company shall pay all reasonable attorneys’ fees and court costs incurred by the Holder in enforcing and collecting this Note.

 

5.             Miscellaneous Provisions.

 

(a)               Waivers. The Company hereby waives demand, notice, presentment, protest and notice of dishonor.

 

(b)               Further Assurances. The Holder agrees and covenants that at any time and from time to time the Holder will promptly execute and deliver to the Company such further instruments and documents and take such further action as the Company may reasonably require in order to carry out the full intent and purpose of this Note and to comply with state or federal securities laws or other regulatory approvals.

 

(c)                Transfers of Notes. This Note may be transferred only upon its surrender to the Company for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company. Thereupon, this Note shall be reissued to, and registered in the name of, the transferee, or a new Note for like principal amount and interest shall be issued to, and registered in the name of, the transferee. Interest and principal shall be paid solely to the registered holder of this Note. Such payment shall constitute full discharge of the Company’s obligation to pay such interest and principal.

 

(d)               Market Standoff. To the extent requested by the Company or an underwriter of securities of the Company, the Holder and any permitted transferee thereof shall not, without the prior written consent of the managing underwriters in the IPO (as hereafter defined), offer, sell, make any short sale of, grant or sell any option for the purchase of, lend, pledge, otherwise transfer or dispose of (directly or indirectly), enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership (whether any such transaction is described above or is to be settled by delivery of Securities or other securities, in cash, or otherwise), any Securities or other shares of stock of the Company then owned by the Holder or any transferee thereof, or enter into an agreement to do any of the foregoing, for up to 180 days following the effective date of the registration statement of the initial public offering of the Company (the “IPO”) filed under the Securities Act. For purposes of this paragraph, “Company” includes (x) any wholly owned subsidiary of the Company into which the Company merges or consolidates or (y) any corporation that the Company converts into. The Company may place restrictive legends on the certificates representing the shares subject to this paragraph and may impose stop transfer instructions with respect to the Securities and such other shares of stock of the Holder and any transferee thereof (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. The Holder and any transferee thereof shall enter into any agreement reasonably required by the underwriters to the IPO to implement the foregoing within any reasonable timeframe so requested. The underwriters for any IPO are intended third party beneficiaries of this paragraph and shall have the right, power and authority to enforce the provisions of this paragraph as though they were parties hereto.

 

 

 

  6  

 

 

(e)               Amendment and Waiver. Any term of this Note may be amended or waived with the written consent of the Company and the Holder. In addition, any term of this Note may be amended or waived with the written consent of the Company and the Majority Holders if such amendment or waiver applies to all Holders of the Notes in the same fashion. Upon the effectuation of such waiver or amendment with the consent of the required parties in conformance with this paragraph, such amendment or waiver shall be effective as to, and binding against the holders of, all of the Notes and the Company shall promptly give written notice thereof to the Holder if the Holder has not previously consented to such amendment or waiver in writing; provided that the failure to give such notice shall not affect the validity of such amendment or waiver.

 

(f)               Governing Law. This Note shall be governed by and construed under the laws of the State of Colorado, as applied to agreements among Colorado residents, made and to be performed entirely within the State of Colorado, without giving effect to conflicts of laws principles.

 

(g)              Binding Agreement. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Note, expressed or implied, is intended to confer upon any third party any rights, remedies, obligations or liabilities under or by reason of this Note, except as expressly provided in this Note.

 

(h)              Counterparts; Manner of Delivery. This Note may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, Uniform Electronic Transactions Act or other applicable law) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

 

(i)               Titles and Subtitles. The titles and subtitles used in this Note are used for convenience only and are not to be considered in construing or interpreting this Note.

 

(j)               Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications to a party shall be sent to the party’s address set forth on the signature page hereto or at such other address(es) as such party may designate by 10 days’ advance written notice to the other party hereto.

 

(k)             Expenses. The Company and the Holder shall each bear its respective expenses and legal fees incurred with respect to the negotiation, execution and delivery of this Note and the transactions contemplated herein.

 

(l)               Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Holder, upon any breach or default of the Company under this Note shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character by the Holder of any breach or default under this Note, or any waiver by the Holder of any provisions or conditions of this Note, must be in writing and shall be effective only to the extent specifically set forth in writing and that all remedies, either under this Note, or by law or otherwise afforded to the Holder, shall be cumulative and not alternative. This Note shall be void and of no force or effect in the event that the Holder fails to remit the full principal amount to the Company within five calendar days of the date of this Note.

 

(m)             Entire Agreement. This Note constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof, and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein.

 

 

 

  7  

 

 

(n)               Exculpation among Holders. The Holder acknowledges that the Holder is not relying on any person, firm or corporation, other than the Company and its officers and Board members, in making its investment or decision to invest in the Company.

 

(o)              Senior Indebtedness. The indebtedness evidenced by this Note is subordinated in right of payment to the prior payment in full of any Senior Indebtedness in existence on the date of this Note or hereafter incurred. “Senior Indebtedness” shall mean, unless expressly subordinated to or made on a parity with the amounts due under this Note, all amounts due in connection with (i) indebtedness of the Company to banks or other lending institutions regularly engaged in the business of lending money (excluding venture capital, investment banking or similar institutions and their affiliates, which sometimes engage in lending activities but which are primarily engaged in investments in equity securities), and (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor.

 

(p)              Broker’s Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker’s or finder’s fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this subsection being untrue.

 

(q)               California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS NOTE HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS NOTE ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING AVAILABLE.

 

[Signature pages follow]

 

 

 

 

 

 

 

 

 

 

 

 

  8  

 

 

The parties have executed this Convertible Promissory Note as of the date first noted above.

 

  COMPANY:
   

 

 

 

Clip Interactive, LLC
   
  By:  
     
    Name: Michael Lawless
    Title: Chief Executive Officer
     
  E-mail: mlawless@clipinteractive.com
   
  Address:

5755 Central Avenue C

Boulder, Colorado 80301

     
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Signature Page for Convertible Promissory Note

 

 

 

  9  

 

 

The parties have executed this Convertible Promissory Note as of the date first noted above.

 

  HOLDER (if an entity):
   
Name of Holder:  
   
  By:  
     
    Name:  
    Title:  
   
  E-mail:  
   
  Address:  
     
     
     
  TIN:  

 

 

  HOLDER (if an individual):
   
Name of Holder:  
   
   
Signature:  
   
  E-mail:  
   
  Address:  
     
     
     
  SSN:  

 

 

 

Signature Page for Convertible Promissory Note

 

 

 

  10  

 

 

Amendment and Addendum to Convertible Promissory Note

 

Reference is made to that certain convertible promissory note dated _________, 20__ (the “Note”) of Clip Interactive, LLC issued to the undersigned Holder. Capitalized terms not otherwise defined in this Amendment and Addendum (the “Addendum”) shall have the meanings ascribed to them as set forth in the Note.

 

The Note is hereby amended as follows:

 

1. The conversion price adjustment component set forth in the first sentence of Section 2(a) of the Note shall be [0.25/0.50] rather than 0.70. Such [0.25/0.50] price adjustment component shall also be used for any optional conversion pursuant to Section 2(b) of the Note.

 

2. The repayment premium set forth in the first sentence of Section 2(d) of the Note shall be 50% rather than 30%.

 

Any term of this Addendum may be amended or waived with the written consent of the Company and the Holder. In addition, any term of this Addendum may be amended or waived with the written consent of the Company and the Majority Holders if such amendment or waiver applies to all other Holders in the same fashion. Notwithstanding the foregoing, this Addendum may not be amended, and the observance of any term of this Addendum may not be waived, with respect to any particular group of Holders without the written consent of a majority of the outstanding principal amount of such particular group of Holders (the “Group Majority Holders”), if such amendment or waiver treats such particular group of Holders in a manner that is materially and adversely different than other Holders or other groups of Holders to which such amendment or waiver is applied.

 

The parties have executed this Amendment and Addendum to Convertible Promissory Note as of the date first noted above.

 

  COMPANY:
   

 

 

 

Clip Interactive, LLC
   
  By:  
     
    Name: Michael Lawless
    Title: Chief Executive Officer
     
  E-mail: mlawless@clipinteractive.com
   
  Address:

5755 Central Avenue C

Boulder, Colorado 80301

     
     

 

 

Signature Page for Amendment and Addendum to Convertible Promissory Note

 

 

 

  11  

 

 

  HOLDER (if an entity):
   
Name of Holder:  
   
  By:  
     
    Name:  
    Title:  
   
     
   
     
     
     

 

 

  HOLDER (if an individual):
   
Name of Holder:  
   
   
Signature:  
   
     
   
     
     
     

 

 

 

 

 

 

 

 

  

 

 

 

 

Signature Page for Amendment and Addendum to Convertible Promissory Note

 

 

 

  12  

 

Exhibit 10.7

 

CHANGE IN TERMS AGREEMENT References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. CLIP INTERACTIVE, LLC 3100 CARBON PL, STE 102 BOULDER, CO 80301 Borrower: Lender: BANK OF THE WEST SME BBC South Denver #21191 9335 East County Line Road Centennial, CO 80112 Principal Amount: $6,000,000.00 DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note dated April 10, 2018 in the original principal amount of $6,000,000.00. DESCRIPTION OF COLLATERAL. Assignment of Deposit Accounts (3) dated April 10, 2018. DESCRIPTION OF CHANGE IN TERMS. Date of Agreement: July 15, 2019 1. Extension of Maturity Date. Consistent with our existing periodic payment arrangement, the Maturity Date of the Promissory Note shall be extended to July 10, 2020. 2. COLLATERAL. The collateral provision is modified as follows: Released Collateral. The following described Collateral has been released as security: Assignment of Deposit account dated April 10 , 2018 for RICHARD M MINICOZZI and JANINA Y MINICOZZI - Savings Account # 05347769 (CoBiz Account), and Assignment of Deposit account dated April 10 , 2018 for JEFFREY THRAMANN - Savings Account # 03551385 (CoBiz Account) . CONTINUING VALIDITY . Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including al! agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect . Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms . Nothing in this Agreement will constitute a satisfaction of the obligation(s) . It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing . Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non - signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it . This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions . PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT. BORROWER: CLIP INTERACTIVE, LLC Manager o f CLIP L..ase,P,o, Vo,. 19.1.10.018 Cop,. Fl""'"" USA CotpooaHon 1997. 2019. All Rights Reserved, • CO C: \ CFI \ LPL \ D20C.FC TR - 185W9 PR - <l

     

 

                                                                      

 

 

 

CHANGE IN TERMS References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. CLIP INTERACTIVE, LLC 3100 CARBON PL, STE 102 BOULDER, CO 80301 Borrower: Lender: BANK OF THE WEST SME BBC South Denver #21191 9335 East County Line Road Centennial, CO 80112 Date of Agreement: July 15, 2019 DESCRIPTION OF EXISTING INDEBTEDNESS. For existing Indebtedness, refer to the definition of "Note" in the Business Loan Agreement {Master) dated April 10 , 2018 DESCRIPTION OF CHANGE IN TERMS. 1. The heading captioned "Prohibition on Leasing to Marijuana Related Businesses" is hereby added to the Agreement and reads as follows : Prohibition on Leasing to Marijuana Related Businesses . During the life of the Loan, Borrower shall not lease space to any business engaged in any activity that is illegal under federal, state or local law, including, without limitation a marijuana - related business . For purposes hereof, a "marijuana - related business" means any business that (i) grows, produces, processes, distributes or sells marijuana or marijuana products, edibles or derivatives (collectively, "marijuana"), regardless of the amount of such activity ; {ii) derived any of its gross revenue for the previous year or projects to derive any of its gross revenue for the next year from sales to any business described in subparts (i), {ii) or {iii) of this subsection or otherwise could reasonably be determined to support the use, growth, enhancement or other development of marijuana, including the provision of services or the selling of goods that may be used directly or indirectly in any such business or in the use or consumption of marijuana ; and {iii) a business that grows, produces, processes, distributes or sells products purportedly made from hemp, unless the business can demonstrate that its hemp - related business activities and products are legal under federal and state law . 2. The heading captioned "Sale or Transfer of Ownership Interests of a Guarantor" is hereby added to the Agreement and reads as follows : Sale or Transfer of Ownership Interests of a Guarantor . The direct or indirect sale or other transfer of more than 25 % in the aggregate of the shares of any stock of Guarantor, if a corporation, of the membership interests of Guarantor, if a limited liability company, of the partnership interests of Guarantor, if a partnership, or of any other ownership interests of Guarantor, or a change in the trust beneficiaries of Guarantor, if trustee(s) of a trust, or entering into any agreement for such sale or other transfer or change in trust beneficiaries made without Lender's prior written consent . To the extent of any conflict between this subsection and the subsection headed Change of Ownership, this subsection shall control . CONTINUING VALIDITY . Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation{s), remain unchanged and in full force and effect . Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms . Nothing in this Agreement will constitute a satisfaction of the obligation(s) . It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties unless a party is expressly released by Lender in writing . Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement . If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non - signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it . This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions . PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL OF THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT. CHANGE IN TERMS SIGNERS:. BORROWER: CLIP INTERACTIVE, LLC By: - --- ~ FRE Y THRAMANN , Manager o f CLIP INTERACTIVE, LLC LENDER: BANK OF THE WEST l.aserPm, Vor. 19.1.10.016 C<lpr_ Flnast<a USA CmporaUon 1997, 2019 All RJghls Ro,ee,e<i_ - CO C: \ CFl \ lPL \ GoO.FC TR - 186003 PR - 86

     

 

 

COMMERCIAL GUARANTY References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. CLIP INTERACTIVE, LLC 3100 CARBON PL, STE 102 BOULDER,CO 80301 Borrower: Lender: BANK OF THE WEST SME BBC South Denver #21191 9335 East County Line Road Centennial, CO 80112 Guarantor: JEFFREY THRAMANN 8580 STRAWBERRY LN NIWOT, CO 80503 CONTINUING GUARANTEE OF PAYMENT AND PERFORMANCE . For good and valuable consideration, Guarantor absolutely and unconditionally guarantees full and punctual payment and satisfaction of the Indebtedness of Borrower to Lender, and the performance and discharge of all Borrower's obligations under the Note and the Related Documents . This is a guaranty of payment and performance and not of collection, so Lender can enforce this Guaranty against Guarantor even when Lender has not exhausted Lender's remedies against anyone else obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness . Guarantor will make any payments to Lender or its order, on demand, in legal tender of the United States of America, in same - day funds, without set - off or deduction or counterclaim, and will otherwise perform Borrower's obligations under the Note and Related Documents . Under this Guaranty, Guarantor's liability is unlimited and Guarantor's obligations are continuing . INDEBTEDNESS . The word "Indebtedness" as used in this Guaranty means all of the principal amount outstanding from time to time and at any one or more times, accrued unpaid interest thereon and all collection costs and legal expenses related thereto permitted by law, attorneys' fees, arising from any and all debts, liabilities and obligations of every nature or form, now existing or hereafter arising or acquired, that Borrower individually or collectively or interchangeably with others, owes or will owe Lender . "Indebtedness" includes, without limitation, loans, advances, debts, overdraft indebtedness, credit card indebtedness, lease obligations, liabilities and obligations under any interest rate protection agreements or foreign currency exchange agreements or commodity price protection agreements, other obligations, and liabilities of Borrower, and any present or future judgments against Borrower, future advances, loans or transactions that renew, extend, modify, refinance, consolidate or substitute these debts, liabilities and obligations whether : voluntarily or involuntarily incurred ; due or to become due by their terms or acceleration ; absolute or contingent ; liquidated or unliquidated ; determined or undetermined ; direct or indirect ; primary or secondary in nature or arising from a guaranty or surety ; secured or unsecured ; joint or several or joint and several ; evidenced by a negotiable or non - negotiable instrument or writing ; originated by Lender or another or others ; barred or unenforceable against Borrower for any reason whatsoever ; for any transactions that may be voidable for any reason (such as infancy, insanity, ultra vires or otherwise) ; and originated then reduced or extinguished and then afterwards increased or reinstated . lf Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender's rights under all guaranties shall be cumulative . This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties . Guarantor's liability will be Guarantor's aggregate liability under the terms of this Guaranty and any such other unterminated guaranties . CONTINUING GUARANTY . THIS IS A "CONTINUING GUARANTY" UNDER WHICH GUARANTOR AGREES TO GUARANTEE THE FULL AND PUNCTUAL PAYMENT, PERFORMANCE AND SATISFACTION OF THE INDEBTEDNESS OF BORROWER TO LENDER, NOW EXISTING OR HEREAFTER ARISING OR ACQUIRED, ON AN OPEN AND CONTINUING BASIS . ACCORDINGLY, ANY PAYMENTS MADE ON THE INDEBTEDNESS WILL NOT DISCHARGE OR DIMINISH GUARANTOR'S OBLIGATIONS AND LIABILITY UNDER THIS GUARANTY FOR ANY REMAINING AND SUCCEEDING INDEBTEDNESS EVEN WHEN ALL OR PART OF THE OUTSTANDING INDEBTEDNESS MAY BE A ZERO BALANCE FROM TIME TO TIME . DURATION OF GUARANTY . This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all the Indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all of Guarantor's other obligations under this Guaranty shall have been performed in full . If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing . Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at Lender's address listed above or such other place as Lender may designate in writing . Written revocation of this Guaranty will apply only to new Indebtedness created after actual receipt by Lender of Guarantor's written revocation . For this purpose and without limitation, the term "new Indebtedness" does not include the Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due . For this purpose and without limitation, "new Indebtedness" does not include all or part of the Indebtedness that is : incurred by Borrower prior to revocation ; incurred under a commitment that became binding before revocation ; any renewals, extensions, substitutions, and modifications of the Indebtedness . This Guaranty shall bind Guarantor's estate as to the Indebtedness created both before and after Guarantor's death or incapacity, regardless of Lender's actual notice of Guarantor's death . Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect . Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty . A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty . It is anticipated that fluctuations may occur in the aggregate amount of the Indebtedness covered by this Guaranty, and Guarantor specifically acknowledges and agrees that reductions in the amount of the Indebtedness, even to zero dollars ( $ 0 . 00 ), shall not constitute a termination of this Guaranty . This Guaranty is binding upon Guarantor and Guarantor's heirs, successors and assigns so long as any of the Indebtedness remains unpaid and even though the Indebtedness may from time to time be zero dollars ( $ 0 . 00 ) . GUARANTOR'S AUTHORIZATION TO LENDER . Guarantor authorizes Lender, either before or after any revocation hereof, without notice or demand and without lessening Guarantor's liability under this Guaranty, from time to time : (A) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower ; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness ; extensions may be repeated and may be for longer than the original loan term ; (C) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral ; (D) to release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose ; (E) to determine how, when and what application of payments and credits shall be made on the Indebtedness ; (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine ; (G) to sell, transfer, assign or grant participations in all or any part of the Indebtedness ; and (H) to assign or transfer this Guaranty in whole or in part .

 
 

COMMERCIAL GUARANTY (Continued) Page 2 GUARANTOR'S REPRESENTATIONS AND WARRANTIES . Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty ; (B) this Guaranty is executed at Borrower's request and not at the request of Lender ; {C) Guarantor has full power, right and authority to enter into this Guaranty ; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result In a violation of any law, regulation, court decree or order applicable to Guarantor ; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein ; (F) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is provided ; (G) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition ; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened ; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower ; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition . Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower . GUARANTOR'S FINANCIAL STATEMENTS. Guarantor agrees to furnish Lender with the following: Additional Requirements. Annual Financial Statement . Not tater than November 15 , a copy of the annual financial report of the Guarantor for the prior calendar year . Federal Tax Returns . Not later than November 15 of each year, or immediately after filing, a copy of the Guarantor's federal income tax returns, filed for such year . K 1 Schedules . K - 1 schedules are not required to be included with the copy of the federal income tax returns furnished to Lender unless specifically requested by Lender . If any K - 1 schedule is requested by Lender after the respective federal income tax returns to which such K - 1 schedule was attached has already been delivered to Lender, then Borrower shall furnish a copy of the requested K - 1 schedule not later than 30 days after the date Lender delivers a request therefor . All financial reports required to be provided under this Guaranty shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Guarantor as being true and correct . GUARANTOR'S WAIVERS . Except as prohibited by applicable law, Guarantor waives any right to require Lender (A) to continue lending money or to extend other credit to Borrower ; (B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations ; (C) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor ; (D) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person ; (E) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code ; (F) to pursue any other remedy within Lender's power ; or (G) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever . Guarantor also waives any and all rights or defenses based on suretyship or impairment of collateral including, but not limited to, any rights or defenses arising by reason of {A) any "one action" or "anti - deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, either judicially or by exercise of a power of sale ; {B) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness ; {C) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower's liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness ; (D) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness ; (E) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced, there is outstanding Indebtedness which is not barred by any applicable statute of limitations ; or (F) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness . If payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy or to any similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of the enforcement of this Guaranty . Guarantor further waives and agrees not to assert or c!aim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both . GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS . Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law . If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shal! be effective only to the extent permitted by law or public policy . RIGHT OF SETOFF . To the extent pennitted by applicable !aw, Lender reserves a right of setoff in all Guarantor's accounts with Lender (whether checking, savings, or some other account) . This includes al! accounts Guarantor holds jointly with someone else and all accounts Guarantor may open in the future . However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law . Guarantor authorizes Lender, to the extent permitted by applicable law, to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the tem,s of this Guaranty . SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR . Guarantor agrees that the Indebtedness, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent . Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower . In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness . Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower ; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness . lf Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of

 
 

COMMERCIAL GUARANTY (Continued) Page 3 Borrower to Guarantor shalt be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender . Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty . LIMITATION ON SALE OR TRANSFER OF EQUITY INTERESTS IN GUARANTOR . Guarantor acknowledges that a material condition to Lender's agreement to the tenns of the Indebtedness, including but not limited to interest rate and repayment terms, is the common ownership of Borrower and Guarantor . Accordingly, while this Agreement remains in effect (including any renewal, replacement, refinancing, restatement or other modification of this Agreement), Guarantor shall not, without Lender's prior written consent : (i) directly or indirectly sell or otherwise transfer in the aggregate more than 25 % of the shares of common stock of Guarantor, if a corporation, of the membership interests of Guarantor, if a limited liability company, of the partnership interests of Guarantor, if a partnership, or of any other equitable ownership interests of Guarantor, (ii) change the trust beneficiaries if Guarantor is a trustee of a trust or (iii) enter into any agreement for such sale or other transfer of ownership or such change in trust beneficiary . If Lender consents to any such a sale or transfer of ownership or change in trust beneficiaries, Lender may condition its consent upon Borrower's agreement to modifications to the terms of the Indebtedness as required by Lender in its sole discretion, including without limitation an increase in the interest rate and other changes to the repayment terms of the Indebtedness . MISCELLANEOUS PROVISIONS, The following miscellaneous provisions are a part of this Guaranty : Amendments . This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty . No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Guarantor agrees to pay upon demand all of Lender's reasonable costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty . Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shalt pay the reasonable costs and expenses of such enforcement . Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection services . Guarantor also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings . Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty . Governing Law . This Guaranty will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . Choice of Venue . If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of Arapahoe County, State of Colorado . Integration . Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty ; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty ; the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty . Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph . Interpretation . In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require ; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them . The words "Guarantor," "Borrower," and ''Lender" include the heirs, successors, assigns, and transferees of each of them . If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced . Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable . If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty . Notices . Any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty . All revocation notices by Guarantor shall be in writing and shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled "DURATION OF GUARANTY . " Any party may change its address for notices under this Guaranty by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address . Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty . No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Successors and Assigns . Subject to any limitations stated in this Guaranty on transfer of Guarantor's interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns . Waive Jury . Lender and Guarantor hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Guarantor against the other . DEFINITIONS . The following capitalized words and terms shall have the following meanings when used in this Guaranty . Unless specifically stated to the contrary, al! references to dollar amounts shall mean amounts in lawful money of the United States of America . Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require . Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code :

 
 

COMMERCIAL GUARANTY (Continued) Page 4 Borrower. The word "Borrower" means CLIP INTERACTIVE, LLC and includes all co - signers and co - makers signing the Note and al! their successors and assigns. GAAP. The word "GMP" means generally accepted accounting principles. Guarantor. The word "Guarantor" means everyone signing this Guaranty, including without limitation JEFFREY THRAMANN, and in each case, any signer's successors and assigns. Guaranty. The word "Guaranty" means this guaranty from Guarantor to Lender. Indebtedness. The word "Indebtedness" means Borrower's indebtedness to Lender as more particularly described in this Guaranty. Lender. The word "Lender" means BANK OF THE WEST, its successors and assigns. Note . The word "Note" means and includes without limitation all of Borrower's promissory notes and/or credit agreements evidencing Borrower's loan obligations in favor of Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for promissory notes or credit agreements . Related Documents . The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness . EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS . IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY"" . NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE . THIS GUARANTY IS DATED JULY 15 , 2019 . GUARANTOR: 1..a.. tf'ro, VeL 1E,1.10.016 Copr. Faoa.,I@ \ !SA Corpora oo 1997, 2019. All Rlflhts ResarvOO. - co C: \ CFIII.PL \ E20.FC TR - 185 \ >99 FR - 116

 
 

 

 

     

 

Loan No: MASTER BUSINESS LOAN AGREEMENT (Continued) Page 2 relating to such properties . All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five ( 5 ) years . Hazardous Substances . Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that ( 1 ) During the period of Borrower's ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral . ( 2 ) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws ; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral ; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters . ( 3 ) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral ; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws . Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement . Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person . The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances . Borrower hereby ( 1 ) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and ( 2 ) agrees to indemnify, defend, and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral . The provisions of this section of the Agreement, including the obligation to indemnify and defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise . Litigation and Claims . No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing . Taxes . To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided . Lien Priority . Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral . Binding Effect . This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms . AFFIRMATIVE COVENANTS . Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will : Notices of Claims and Litigation . Promptly inform Lender in writing of ( 1 ) all material adverse changes in Borrower's financial condition, and ( 2 ) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor . Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with the following: Additional Requirements. Comply with financial reporting as follows: Federal Tax Returns. Not later than 30 days after filing, a copy of each Borrower's federal income tax returns, including all K - 1 schedules, filed for such year. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, as Lender may request from time to time. Additional Requirements. Comply with the following additional requirements: Deposit Relationship. Maintain its primary business depository relationship with the Lender, including general operating and administrative deposit accounts and cash management services. Notification of Default . Immediately upon becoming aware of the existence of any condition or event which constitutes an Event of Default, or any condition or event which would upon notice or lapse of time, or both, constitute an Event of Default, Borrower shall give Lender written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto . Material Notices . Give the Lender prompt written notice of any and all ( 1 ) litigation, arbitration or administrative proceedings to which the Borrower is a party or which affects the Collateral ; ( 2 ) other matters which have resulted in, or might result in a material adverse change in the Collateral or the financial condition or business operations of the Borrower, and ( 3 ) any enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the Borrower or any of its properties . Insurance . Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender . Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty ( 30 ) days prior written notice to Lender . Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person . In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require . Insurance Reports . Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as

 
 

 

     

 

 

Loan No: MASTER BUSINESS LOAN AGREEMENT (Continued) Page 4 Equipment Value . The words "Equipment Value" mean the lesser of : the invoice cost of the equipment (including seller premiums or commissions, plus sales tax, freight, installation, and other reasonable costs . ) ; or the book value of the equipment or the liquidation value of the equipment as determined by the Lender . GAAP . "GAAP" shall mean generally accepted accounting principles in effect from time to time in the United States . Liabilities . The word "Liabilities" shall mean ( 1 ) all indebtedness for borrowed money or for the deferred purchase price of property or services, and all obligations under leases which are or should be, under GAAP, recorded as capital leases, in respect of which a person is directly or contingently liable as borrower, guarantor, endorser or otherwise, or in respect of which a person otherwise assures a creditor against loss, { 2 ) a!! obligations for borrowed money or for the deferred purchase price of property or services secured by (or for which the holder has an existing right, contingent or otherwise, to be secured by) any lien upon property (including without limitation accounts receivable and contract rights) owned by a person, whether or not such person has assumed or become liable for the payment thereof, and ( 3 ) all other liabilities and obligations which would be classified in accordance with GAAP as liabilities on a balance sheet or to which reference should be made in footnotes thereto . Liquid Assets . The words "Liquid Assets" shall mean, as of the date of determination thereof, cash on hand, plus the value of Marketable Securities, minus the value of restricted retirement assets and minus the amount of any margined loans . Marketable Securities . The words "Marketable Securities" shall mean stocks, bonds and mutual fund shares that can be readily sold for cash on stock exchanges or over - the - counter markets . Net Income . The words "Net Income" shall mean, for any period, net income (or net loss, expressed as a negative number) after taxes actually paid in cash or accrued and all expenses and other charges for such period, determined in accordance with GAAP . Permitted Liens . The words "Permitted Liens" shall mean : ( 1 ) liens and security interests securing Total Funded Indebtedness owed by the Borrowers to the Lender ; ( 2 ) liens for taxes, assessments or similar charges not yet due ; ( 3 } liens of materia!men, mechanics, warehousemen, or carriers or other like Hens arising in the ordinary course of business and securing obligations which are not yet delinquent ; { 4 } purchase money liens or purchase money security interests upon or in any property acquired or held by any of the Borrowers in the ordinary course of business to secure Senior Funded Indebtedness outstanding on the date hereof or permitted to be incurred herein ; ( 5 } liens and security interests which, as of the date hereof, have been disclosed to and approved by the Lender in writing ; and ( 6 } those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrowers' assets . Senior Funded Indebtedness . The words "Senior Funded Indebtedness" shall mean, as of the date of determination thereof, all borrowed money as reflected in the most recent financial statements in the form required by this Agreement, if any, excluding all such borrowed money that has been subordinated to the satisfaction of Lender . Subordinated Liabilities. The words "Subordinated Liabilities" shall mean as of the date of determination thereof, all Liabilities that have been subordinated in writing to the obligations owing to the Lender on terms and conditions acceptable to the Lender. Total Funded Indebtedness. The words "Total Funded Indebtedness" shall mean, as of the date of determination thereof, all borrowed money as reflected in the most recent financial statements in the form required by this Agreement, lf any. Unencumbered. The words "Unencumbered" shall mean subject to no restriction, pledge, lien, claim or other encumbrance. Value . The word 'Value" means the lesser of the Borrower's cost of Eligible Inventory or the book value thereof or the wholesale market value thereof in such quantities and on such terms as the Lender in its sole discretion may deem appropriate . Working Capital . The words "Working Capita!" shall mean the sum of Current Assets minus the sum of Current Liabilities . RECOVERY OF ADDITIONAL COSTS . If the imposition of or any change in any law, rule, regulation, guideline, or generally accepted accounting principle, or the interpretation or application of any thereof by any court, administrative or governmental authority, or standard - setting organization (including any request or policy not having the force of !aw) shall impose, modify or make applicable any taxes (except federal, state or local income or franchise taxes imposed on Lender}, reserve requirements, capital adequacy requirements or other obligations which would (A) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (B) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (C) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five ( 5 ) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error . LENDER'S EXPENDITURES . If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral . All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower . All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand ; (B} be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either ( 1 } the term of any applicable insurance policy ; or ( 2 ) the remaining term of the Note ; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity . CESSATION OF ADVANCES . If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if : (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender ; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt ; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan ; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender ; or (E} Lender in good faith deems itself insecure, even though no Event of Default shall have occurred . RIGHT OF SETOFF . To the extent permitted by applicable law, Lender reserves a right of setoff in a!! Borrower's accounts with Lender (whether checking, savings, or some other account} . This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future . However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law . Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts .

 
 

Loan No: MASTER BUSINESS LOAN AGREEMENT (Continued) Page 5 DEFAULT . Each of the following shall constitute an Event of Default under this Agreement Payment Default . Borrower fails to make any payment when due under the Loan . Other Defaults . Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained ln any other agreement between Lender and Borrower . Default in Favor of Third Parties . Borrower or any Granter defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Death or Insolvency . The dissolution of Borrower (regardless of whether election to continue is made), any member withdraws from Borrower, or any other termination of Borrower's existence as a going business or the death of any member, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower . Defective Collateralization . This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien} at any time and for any reason . Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan . This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute . Events Affecting Guarantor . Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness . Adverse Change . A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired . Insecurity . Lender in good faith believes itself insecure . Judgment Default . A judgment or judgments for the payment of money shall be rendered against the Borrower or any guarantor of the Obligations, and any such judgment shall remain unsatisfied and in effect for any period of thirty ( 30 ) consecutive days without a stay of execution . EFFECT OF AN EVENT OF DEFAULT . If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements}, and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional . In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise . Except as may be prohibited by applicable Jaw, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies . NEGATIVE COVENANTS . Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will comply with the following : Limitations on Senior Funded Indebtedness . Borrower shall not after the date hereof, create, incur or assume, directly or indirectly, any additional Senior Funded Indebtedness other than Senior Funded Indebtedness owed or to be owed to Lender . Liens and Encumbrances . Not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust, or other llen (including, but not limited to, a lien of attachment, judgment or execution} affecting any of the Borrower's properties, or execute or allow to be filed any financing statement or continuation thereof affecting any of such properties, except for Permitted Liens or as otherwise provided in this Agreement . Capital Expenditures . Borrower shall not, directly or indirectly, make or commit to make capital expenditures by lease, purchase, or otherwise, except in the ordinary and usual course of business for the purpose of replacing machinery, equipment or other personal property which, as a consequence of wear, duplication or obsolescence, is no longer used or necessary in the Borrower's business . Mergers . Borrower shall not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization . Loans or Advances . Borrower shall not make any Joans or advances to any individual, partnership, corporation, limited liability company, trust, or other organization or person, including without limitation its officers and employees ; provided, however, that Borrower may make advances to its employees, including its officers, with respect to expenses incurred or to be incurred by such employees in the ordinary course of business which expenses are reimbursable by Borrower ; and provided further, however, that Borrower may extend credit in the ordinary course of business in accordance with customary trade practices . Sale of Assets . Borrower shall not sell, lease or otherwise dispose of any of its assets, except in the ordinary course of business and except for the purpose of replacing machinery, equipment or other persona! property which, as a consequence of wear, duplication or obsolescence, is no longer used or necessary in the Borrower's business, provided that full, fair and reasonable consideration is received therefor ; provided, however, in no event shall the Borrower sell, lease or otherwise dispose of any equipment purchased with the proceeds of any loans made by the Lender . LLC Repurchase/Interests . Not purchase or repurchase, in whole or in part, any merrlber's interest . Investments . Borrower shall not make investments in, or advances to, any individual, partnership, corporation, limited liability company, trust or other organization or person other than as previously specifically consented to in writing by the Lender . The Borrower will not purchase or otherwise invest in or hold securities, non - operating real estate or other non - operating assets or purchase all or substantially all the assets of any

 
 

Loan No: MASTER BUSINESS LOAN AGREEMENT (Continued) Page 6 entity other than as previously specifically consented to in writing by the Lender. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement . No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Borrower agrees to pay upon demand all of Lender's reasonable costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement . Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the reasonable costs and expenses of such enforcement . Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection services . Borrower also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings . Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement . Consent to Loan Participation . Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender . Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters . Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests . Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests . Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan . Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender . Governing Law . This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . This Agreement has been accepted by Lender in the State of Colorado . Choice of Venue . If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement . No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Granter, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Notices . Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by !aw), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement . Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address . Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers . Severability . lf a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance . lf feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable . If the offending provision cannot be so modified, it shall be considered deleted from this Agreement . Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement . Subsidiaries and Affiliates of Borrower . To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates . Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates . Successors and Assigns . A!! covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns . Borrower shall not, however, have the right to assiQn Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender . Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or ln any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. Time is of the Essence. Time is of the essence in the performance of this Agreement. Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms

 
 

Loan No: MASTER BUSINESS LOAN AGREEMENT (Continued) Page 7 used in the singular shall include the plural, and the plural shall include the singular, as the context may require . Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code . Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement : Advance . The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement . Agreement . The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time . Borrower . The word "Borrower" means CLIP INTERACTIVE, LLC and includes all co - signers and co - makers signing the Note and all their successors and assigns . Collateral . The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise . Environmental Laws . The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 , as amended, 42 U . S . C . Section 9601 , et seq . ("CERCLA"), the Superiund Amendments and Reauthorization Act of 1986 , Pub . L . No . 99 - 499 ("SARA"), the Hazardous Materials Transportation Act, 49 U . S . C . Section 1801 , et seq . , the Resource Conservation and Recovery Act, 42 U . S . C . Section 6901 , et seq . , or other applicable state or federal laws, rules, or regulations adopted pursuant thereto . Event of Default . The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement . GAAP . The word "GAAP" means generally accepted accounting principles . Granter . The word "Granter'' means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest . Guarantor . The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan . Guaranty . The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note . Hazardous Substances . The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled . The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws . The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by - products or any fraction thereof and asbestos . Indebtedness . The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents . Lender . The word "Lender" means BANK OF THE WEST, its successors and assigns . Loan . The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those roans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time . Note . The word "Note" means and includes without limitation all of the Borrower's promissory notes and/or credit agreements, whether now or hereafter existing, evidencing Borrower's loan obligations in favor of Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for promissory notes and/or credit agreements . Related Documents . The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan . Security Agreement . The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest . Security Interest . The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's Hen, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise .

 
 

     

 

     

 

loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 2 protect, and continue Lender's security interest in the Property . Granter will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs . Granter irrevocably appoints Lender to execute documents necessary to transfer title if there is a default . Lender may file a copy of this Agreement as a financing statement . Granter will promptly notify Lender of any change to Grantor's name or the name of any individual Granter, any individual who is a partner for a Granter, and any individual who is a trustee or settler or truster for a Granter under this Agreement . Granter will also promptly notify Lender of any change to the name that appears on the most recently issued, unexpired driver's license or state - issued identification card, any expiration of the most recently issued driver's license or state - issued identification card for Granter or any individual for whom Granter is required to provide notice regarding name changes . LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL . While this Agreement is in effect, Lender may retain the rights to possession of the Collateral, together with any and all evidence of the Collateral, such as certificates or passbooks . Lender may notify the institution which issued the Collateral of this Agreement . Granter agrees that such institution will not pay any amount on the Collateral, other than to Lender, so long as this Agreement is in effect . This Agreement will remain in effect until (a) there no longer is any Indebtedness owing to Lender ; (b) all other obligations secured by this Agreement have been fulfilled ; and (c) Granter, in writing, has requested from Lender a release of this Agreement . LENDER'S EXPENDITURES . If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Granter fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Granter is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral . All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor . To the extent permitted by applicable law, all such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand ; ( 8 ) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either ( 1 ) the term of any applicable insurance policy ; or ( 2 ) the remaining term of the Note ; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity . The Agreement also will secure payment of these amounts . Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default . LIMITATIONS ON OBLIGATIONS OF LENDER . Lender shall use ordinary reasonable care in the physical preservation and custody of any certificate or passbook for the Collateral but shall have no other obligation to protect the Collateral or its value . In particular, but without limitation, Lender shall have no responsibility (A) for the collection or protection of any income on the Collateral ; (B) for the preservation of rights against issuers of the Collateral ,or against third persons ; (C) for ascertaining any maturities, conversions, exchanges, offers, tenders, or similar matters relating to the Collateral ; nor ( 0 ) for informing the Granter about any of the above, whether or not Lender has or is deemed to have knowledge of such matters . DEFAULT . Each of the following shall constitute an Event of Default under this Agreement : Payment Default . Borrower fails to make any payment when due under the Indebtedness . Other Defaults . Borrower or Granter fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower or Granter . Default in Favor of Third Parties. Borrower, any guarantor or Granter defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's, any guarantor's or Grantor's property or ability to perform their respective obligations under this Agreement or any of the Related Documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or Granter or on Borrower's or Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Death or Insolvency . The death of Borrower or Granter or the dissolution or termination of Borrower's or Grantor's existence as a going business, the insolvency of Borrower or Granter, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Granter . Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Borrower or Granter or by any governmental agency against any collateral securing the Indebtedness . This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Granter as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower or Granter gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reseive or bond for the dispute . Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Adverse Change. A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender in good faith believes itself insecure. RIGHTS AND REMEDIES ON DEFAULT . Upon the occurrence of an Event of Default, or at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any rights or remedies that may be available at law, ln equity, or otherwise : Accelerate Indebtedness. Lender may declare all Indebtedness of Borrower to Lender immediately due and payable, without notice of any kind to Borrower or Granter. Surrender of Account. Lender may surrender the Account to the Issuer and obtain payment thereunder subject to any early withdrawal penalty imposed by the Issuer, when applicable. Application of Account Proceeds. Lender may obtain all funds in the Account from the issuer of the Account and apply them to the

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 3 Indebtedness in the same manner as if the Account had been issued by Lender . If the Account is subject to an early withdrawal penalty, that penalty shall be deducted from the Account before its application to the Indebtedness, whether the Account is with Lender or some other institution . Any excess funds remaining after application of the Account proceeds to the Indebtedness will be paid to Borrower or Granter as the interests of Borrower or Granter may appear . Borrower agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Account to the Indebtedness . Lender also shall have all the rights of a secured party under the Texas Uniform Commercial Code, even if the Account is not otherwise subject to such Code concerning security interests, and the parties to this Agreement agree that the provisions of the Code giving rights to a secured party shall nonetheless be a part of this Agreement . Transfer Title . Lender may effect transfer of title upon sale of all or part of the Collateral . For this purpose, Granter irrevocably appoints Lender as Grantor's attorney - in - fact to execute endorsements, assignments and instruments in the name of Granter and each of them (if more than one) as shall be necessary or reasonable . Other Rights and Remedies . Lender shall have and may exercise any or all of the rights and remedies of a secured credrtor under the provisions of the Texas Uniform Commercial Code, at law, in equity, or otherwise . Deficiency Judgment If permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section . Election of Remedies . Except as may be prohibited by . applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Granter under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies . Cumulative Remedies . All of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies . ADDITIONAL PROVISIONS. The following provisions are made a part of this Agreement. To the extent of any conflict between the following provisions and any other provision in this Agreement, the following provisions shall control. 1. The Section headed RIGHT OF SETOFF is deleted in its entirety and replaced with the following: "To the extent permitted by applicable law, Lender reserves a right of setoff in the Account." 2. The subsection headed Financing Statements under the section headed MISCELLANEOUS PROVISIONS is revised to provide that any filing fees, title transfer fees, and other fees and costs shall be paid by Borrower. 3. Subsection (c) of the section headed LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL is revised by inserting the word "and" immediately prior to the "(b)" and deleting subsection (c) in its entirety. 4. The section headed LIMITATIONS ON OBLIGATIONS OF LENDER is revised by inserting the clause, "unless otherwise agreed in writing or as provided pursuant to applicable law," in front of the word "Lender'' in the 3rd line. 5. The subsection headed Attorneys' Fees; Expenses under the section headed MISCELLANEOUS PROVISIONS is revised by deleting the word "Granter" each place it appears and inserting in its place the term "Borrower''. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement . No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Granter agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement . Lender may hire or pay someone else to help enforce this Agreement, and Granter shall pay the costs and expenses of such enforcement Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there ls a lawsuit, including Lender's reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection seivices . Granter also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings . Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement . Governing Law . With respect to procedural matters related to the perfection and enforcement of Lender's rights against the Collateral, this Agreement will be governed by federal law applicable to Lender and to the extent not preempted by federal law, the laws of the State of Texas . In all other respects, this Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . However, if there ever is a question about whether any provision of this Agreement is valid or enforceable, the provision that is questioned will be governed by whichever state or federal law would find the provision to be valid and enforceable . The loan transaction that is evidenced by the Note and this Agreement has been applied for, considered, approved and made, and all necessary loan documents have been accepted by Lender in the State of Colorado . Choice of Venue . If there is a lawsuit, Granter agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado . Joint and Several Liability . All obligations of Borrower and Granter under this Agreement shall be joint and several, and all references to Granter shall mean each and every Granter, and all references to Borrower shall mean each and every Borrower . This means that each Borrower and Granter signing below is responsible for all obligations in this Agreement . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement . No prior waiver by Lender, nor any course of dealing between Lender and Granter, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions . \ 1 \ /henever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender .

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 4 Notices . Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Granter agrees to keep Lender informed at all times of Grantor's current address . Unless otheiw 1 se provided or required by law, if there is more than one Granter, any notice given by Lender to any Granter ls deemed to be notice given to all Grantors . Power of Attorney . Grantor hereby appoints Lender as its true and lawful attorney - in - fact, irrevocably, with full power of substitution to do the following : ( 1 ) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral ; ( 2 ) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral ; ( 3 ) to settle or compromise any and alt claims arising under the Collateral, and in the place and stead of Granter, to execute and deliver its release and settlement for the claim ; and ( 4 ) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Granter, or otherwise, which in the discretion of Lender may seem to be necessary or advisable . This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender . Severability . If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any person or circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other person or circumstance . If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable . If the offending provision cannot be so modified, it shall be considered deleted from this Agreement . Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement . Successors and Assigns . Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns . If ownership of the Collateral becomes vested in a person other than Granter, Lender, without notice to Granter, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Granter from the obligations of this Agreement or liability under the Indebtedness . Survival of Representations and Warranties . All representations, warranties, and agreements made by Granter in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full . Time is of the Essence . Time is of the essence in the perfonnance of this Agreement . Waive Jury . All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party . DEFINITIONS . The following capitalized words and terms shall have the following meanings when used in this Agreement . Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America . Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require . Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code : Account . The word "Account'' means the deposit account(s) described in the "Collateral Description" section . Agreement The word "Agreement" means this Assignment of Deposit Account, as this Assignment of Deposit Account may be amended or modified from time to time, together with all exhibits and schedules attached to this Assignment of Deposit Account from time to time . Borrower . The word "Borrower" means CLIP INTERACTIVE, LLC and includes all co - signers and co - makers signing the Note and all their successors and assigns . Collateral . The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement . Default . The word "Default" means the Default set forth in this Agreement in the section titled "Default" . Event of Default . The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement . Grantor . The word "Granter'' means RICHARD M MINICOZZI and JANINA Y MINICOZZI . Guarantor . The word "Guarantor'' means any guarantor, surety, or accommodation party of any or all of the Indebtedness . Guaranty . The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note . Indebtedness . The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents . Lender . The word "Lender" means BANK OF THE WEST, its successors and assigns . Note . The word "Note" means the Note dated April 10 , 2018 and executed by CLIP INTERACTIVE, LLC in the principal amount of $ 6 , 000 , 000 . 00 , together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement . Property . The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement . Related Documents . The words "Related Documents" mean all promissoiy notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness .

 
 

 

     

 

     

 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 2 protect, and continue Lender's security interest in the Property . Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs . Granter irrevocably appoints Lender to execute documents necessary to transfer title if there is a default . Lender may file a copy of this Agreement as a financing statement . Granter will promptly notify Lender of any change to Grantor's name or the name of any individual Granter, any individual who is a partner for a Granter, and any individual who is a trustee or settler or truster for a Granter under this Agreement . Granter will also promptly notify Lender of any change to the name that appears on the most recently issued, unexpired driver's license or state - issued identification card, any expiration of the most recently issued driver's license or state issued identification card for Grantor or any individual for whom Grantor is required to provide notice regarding name changes . LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL . While this Agreement is in effect, Lender may retain the rights to possession of the Collateral, together with any and all evidence of the Collateral, such as certificates or passbooks . Lender may notify the institution which issued the Collateral of this Agreement . Granter agrees that such institution will not pay any amount on the Collateral, other than to Lender, so long as this Agreement is in effect . This Agreement will remain in effect until (a) there no longer is any Indebtedness owing to Lender ; (b) all other obligations secured by this Agreement have been fulfilled ; and (c) Granter, in writing, has requested from Lender a release of this Agreement . LENDER'S EXPENDITURES . Jf any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Granter is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral . All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor . All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand ; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either ( 1 ) the term of any applicable insurance policy ; or ( 2 ) the remaining term of the Note ; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity . The Agreement also will secure payment of these amounts . Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default . LIMITATIONS ON OBLIGATIONS OF LENDER . Lender shall use ordinary reasonable care in the physical preservation and custody of any certificate or passbook for the Collateral but shall have no other obligation to protect the Collateral or its value . In particular, but without limitation, Lender shall have no responsibility (A) for the collection or protection of any income on the Collateral ; (B) for the preservation of rights against issuers of the Collateral or against third persons ; (C) for ascertaining any maturities, conversions, exchanges, offers, tenders, or similar matters relating to the Collateral ; nor (D) for informing the Grantor about any of the above, whether or not Lender has or ls deemed to have knowledge of such matters . DEFAULT . Each of the following shall constitute an Event of Default under this Agreement : Payment Default . Borrower fails to make any payment when due under the Indebtedness . Other Defaults . Borrower or Granter fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower or Granter . Default in Favor of Third Parties . Borrower, any guarantor or Granter defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's, any guarantor's or Grantor's property or ability to perform their respective obligations under this Agreement or any of the Related Documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or Granter or on Borrower's or Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Defective Collateralization . This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason . Death or Insolvency . The death of Borrower or Granter or the dissolution or termination of Borrower's or Grantor's existence as a going business, the insolvency of Borrower or Granter, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Granter . Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Borrower or Grantor or by any governmental agency against any collateral securing the Indebtedness . This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Granter as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower or Granter gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute . Events Affecting Guarantor . Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness . Adverse Change . A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired . Insecurity . Lender in good faith believes itself insecure . RIGHTS AND REMEDIES ON DEFAULT . Upon the occurrence of an Event of Default, or at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any rights or remedies that may be available at law, in equity, or otheiwise : Accelerate Indebtedness . Lender may declare all Indebtedness of Borrower to Lender immediately due and payable, without notice of any kind to Borrower or Granter . Surrender of Account . Lender may surrender the Account to the Issuer and obtain payment thereunder subject to any early withdrawal penalty imposed by the Issuer, when applicable . Application of Account Proceeds . Lender may obtain all funds in the Account from the issuer of the Account and apply them to the

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 3 Indebtedness in the same manner as if the Account had been issued by Lender . If the Account is subject to an early withdrawal penalty, that penalty shall be deducted from the Account before its application to the Indebtedness, whether the Account is with Lender or some other institution . Any excess funds remaining after application of the Account proceeds to the Indebtedness will be paid to Borrower or Granter as the interests of Borrower or Granter may appear . Borrower agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Account to the Indebtedness . Lender also shall have all the rights of a secured party under the Colorado Uniform Commercial Code, even if the Account is not otherwise subject to such Code concerning security interests, and the parties to this Agreement agree that the provisions of the Code giving rights to a secured party shall nonetheless be a part of this Agreement . Transfer Title . Lender may effect transfer of title upon sale of all or part of the Collateral . For this purpose, Grantor irrevocably appoints Lender as Grantor's attorney - in - fact to execute endorsements, assignments and instruments in the name of Grantor and each of them (if more than one) as shall be necessary or reasonable . Other Rights and Remedies . Lender shall have and may exercise any or all of the rights and remedies of a secured creditor under the provisions of the Colorado Uniform Commercial Code, at law, ln equity, or otherwise . Deficiency Judgment lf permitted by applicable law, Lender may obtain a Judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section . Election of Remedies . Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Granter under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies . Cumulative Remedies . All of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obllgation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies . ADDITIONAL PROVISIONS. The following provisions are made a part of this Agreement. To the extent of any conflict between the following provisions and any other provision in this Agreement, the following provisions shall control. 1. The Section headed RIGHT OF SETOFF is deleted in its entirety and replaced with the following: "To the extent permitted by applicable law, Lender reserves a right of setoff in the Account." 2. The subsection headed Financing Statements under the section headed MISCELLANEOUS PROVISIONS is revised to provide that any filing fees, title transfer fees, and other fees and costs shall be paid by Borrower. 3. Subsection (c) of the section headed LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL is revised by inserting the word "and" immediately prior to the "(b)" and deleting subsection (c) in its entirety. 4. The section headed LIMITATIONS ON OBLIGATIONS OF LENDER is revised by inserting the clause, "unless otherwise agreed in writing or as provided pursuant to applicable law," in front of the word "Lender" in the 3rd line. 5. The subsection headed Attorneys' Fees; Expenses under the section headed MISCELLANEOUS PROVISIONS is revised by deleting the word "Granter" each place lt appears and inserting in its place the term "Borrower''. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement . No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Granter agrees to pay upon demand all of Lender's reasonable costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement . Lender may hire or pay someone else to help enforce this Agreement, and Granter shall pay the reasonable costs and expenses of such enforcement . Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection services . Granter also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings . Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement . Governing Law . This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . This Agreement has been accepted by Lender in the State of Colorado . Choice of Venue . If there is a lawsuit, Granter agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado . Joint and Several Liability . All obligations of Borrower and Grantor under this Agreement shall be joint and several, and all references to Granter shall mean each and every Granter, and all references to Borrower shall mean each and every Borrower . This means that each Borrower and Granter signing below is responsible for all obligations in this Agreement . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement . No prior waiver by Lender, nor any course of dealing between Lender and Granter, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Notices . Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement . Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Grantor agrees

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 4 to keep Lender informed at a!I times of Grantor's current address . Unless otherwise provided or required by law, if there is more than one Granter, any notice given by Lender to any Granter is deemed to be notice given to all Granters . Power of Attorney . Granter hereby appoints Lender as its true and lawful attorney - in - fact, irrevocably, with full power of substitution to do the following : ( 1 } to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral ; ( 2 ) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral ; ( 3 ) to settle or compromise any and all claims arising under the Collateral, and in the place and stead of Grantor, to execute and deliver its release and settlement for the claim ; and ( 4 ) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Granter, or otherwise, which in the discretion of Lender may seem to be necessary or advisable . This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender . Severability . If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance . If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable . If the offending provision cannot be so modified, it shall be considered deleted from this Agreement . Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement . Successors and Assigns . Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns . If ownership of the Collateral becomes vested in a person other than Granter, Lender, without notice to Granter, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Granter from the obligations of this Agreement or liability under the Indebtedness . Survival of Representations and Warranties . All representations, warranties, and agreements made by Granter in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full . Time is of the Essence . Time is of the essence in the performance of this Agreement . Waive Jury . All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party . DEFINITIONS . The following capitalized words and terms shall have the following meanings when used in this Agreement . Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America . Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require . Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code : Account . The word "Account" means the deposit account(s) described in the "Collateral Description" section . Agreement . The word "Agreement" means this Assignment of Deposit Account, as this Assignment of Deposit Account may be amended or modified from time to time, together with all exhibits and schedules attached to this Assignment of Deposit Account from time to time . Borrower . The word "Borrower" means CUP INTERACTIVE, LLC and includes all co - signers and co - makers signing the Note and all their successors and assigns . Collateral . The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement . Default . The word "Default" means the Default set forth in this Agreement in the section titled "Default" . Event of Default . The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement . Grantor . The word "Granter" means JEFFREY THRAMANN . Guarantor . The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Indebtedness . Guaranty . The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note . Indebtedness . The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents . Lender . The word "Lender" means BANK OF THE WEST, its successors and assigns . Note . The word "Note" means the Note dated April 1 O, 2018 and executed by CUP INTERACTIVE, LLC in the principal amount of $ 6 , 000 , 000 . 00 , together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement . Property . The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement . Related Documents . The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness .

 
 

     

 

PROMISSORY NOTE References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. CLIP INTERACTIVE, LLC 3100 CARBON PL, STE 102 BOULDER, CO 80301 Borrower : Lender: BANK OF THE WEST SME BBC Northern Front Range #21193 12000 North Washington Thornton, CO 80241 Principal Amount: $6,000,000.00 Date of Note: April 10, 2018 PROMISE TO PAY . CLIP INTERACTIVE, LLC ("Borrower") promises to pay to BANK OF THE WEST ("Lender"), or order, in lawful money of the United States of America, the principal amount of Six Million & 00 / 100 Dollars ( $ 6 , 000 , 000 . 00 ) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance . Interest shall be calculated from the date of each advance until repayment of each advance . PAYMENT . Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on July 10 , 2019 . In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning May 10 , 2018 , with all subsequent interest payments to be due on the same day of each month after that . Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest ; then to principal ; then to any unpaid collection costs ; and then to any late charges . Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing . VARIABLE INTEREST RATE . The interest rate on this Note is subject to change from time to time based on changes in an index which is the Bank of the West Prime Rate (the "Index") . The Index ls not necessarily the lowest rate charged by Lender on its roans and is set by Lender in its sole discretion . If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower . Lender will tell Borrower the current Index rate upon Borrower's request . The interest rate change will not occur more often than each day . Borrower understands that Lender may make loans based on other rates as well . The Index currently is 4 . 750 % per annum . Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate of 1 . 000 percentage point over the Index, adjusted if necessary for any minimum and maximum rate limitations described below, resulting in an initial rate of 5 . 750 % per annum based on a year of 360 days . NOTICE : Under no circumstances will the interest rate on this Note be less than 4 . 000 % per annum or more than the maximum rate allowed by applicable law . INTEREST CALCULATION METHOD . Interest on this Note is computed on a 365 / 360 basis ; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding . All interest payable under this Note is computed using this method . PREPAYMENT . Borrower may pay without penalty all or a portion of the amount owed earlier than it is due . Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest . Rather, eariy payments will reduce the principal balance due . Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language . If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender . All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to : BANK OF THE WEST, SME BBC Northern Front Range # 21193 , 12000 North Washington, Thornton, CO 80241 . LATE CHARGE . If a payment is 15 days or more late, Borrower will be charged 5 . 000 % of the unpaid portion of the regularly scheduled payment . INTEREST AFTER DEFAULT . Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased by adding an additional 5 . 000 percentage point margin ("Default Rate Margin") . The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no default . However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law . DEFAULT . Each of the following shall constitute an event of default ("Event of Default") under this Note : Payment Default . Borrower fails to make any payment when due under this Note . Other Defaults . Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower . Default in Favor of Third Parties . Borrower or any Granter defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Death or Insolvency . The dissolution of Borrower (regardless of whether election to continue is made), any member withdraws from Borrower, or any other termination of Borrower's existence as a going business or the death of any member, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower . Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the roan . This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute . Events Affecting Guarantor . Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness

 
 

     

 

     

 

COMMERCIAL GUARANTY (Continued) Page 2 GUARANTOR'S REPRESENTATIONS AND WARRANTIES . Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty ; (B) this Guaranty is executed at Borrower's request and not at the request of Lender ; (C) Guarantor has full power, right and authority to enter into this Guaranty ; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor ; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein ; (F) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is provided ; (G) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition ; {H) no litigation, claim, investigation, administrative proceeding or similar action {including those for unpaid taxes) against Guarantor is pending or threatened ; ( 1 ) Lender has made no representation to Guarantor as to the creditworthiness of Borrower ; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition . Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower . GUARANTOR'S FINANCIAL STATEMENTS. Guarantor agrees to furnish Lender with the following: Additional Requirements. Annual Financial Statements. Not later than 120 days after the end of each Guarantor's calendar year, a copy of the annual financial report of the Guarantor for such year. Federal Tax Returns. Not later than 30 days after filing, a copy of the Guarantor's federal income tax returns, including all K - 1 schedules, filed for such year. All financial reports required to be provided under this Guaranty shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Guarantor as being true and correct . GUARANTOR'S WAIVERS . Except as prohibited by applicable law, Guarantor waives any right to require Lender {A) to continue lending money or to extend other credit to Borrower ; {B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations ; (C) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor ; {D) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person ; (E) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code ; (F) to pursue any other remedy within Lender's power ; or (G) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever . Guarantor also waives any and all rights or defenses based on suretyship or impairment of collateral including, but not limited to, any rights or defenses arising by reason of {A) any "one action" or "anti - deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, either judicially or by exercise of a power of sale ; {B) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness ; (C) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower's liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness ; (D) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness ; (E) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced, there is outstanding Indebtedness which is not barred by any applicable statute of limitations ; or (F) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness . If payment ls made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy or to any similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of the enforcement of this Guaranty . Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both . GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS . Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law . If any such waiver is determined to be contrary to any applicable Jaw or public policy, such waiver shall be effective only to the extent permitted by !aw or public policy . RIGHT OF SETOFF . To the extent permitted by applicable law, Lender reserves a right of setoff in all Guarantor's accounts with Lender (whether checking, savings, or some other account) . This includes all accounts Guarantor holds jointly with someone else and all accounts Guarantor may open in the future . However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law . Guarantor authorizes Lender, to the extent permitted by applicable law, to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the terms of this Guaranty . SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR . Guarantor agrees that the Indebtedness, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent . Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower . In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness . Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower ; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness . If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender . Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty .

 
 

COMMERCIAL GUARANTY (Continued) Page 3 MISCELLANEOUS PROVISIONS . The following miscellaneous provisions are a part of this Guaranty : Amendments . This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty . No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Guarantor agrees to pay upon demand all of Lender's reasonable costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty . Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the reasonable costs and expenses of such enforcement . Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection services . Guarantor also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings . Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty . Governing Law . This Guaranty will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . Choice of Venue . If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado . Integration . Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty ; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty ; the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty . Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees} suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph . Interpretation . In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require ; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them . The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them . lf a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced . Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable . If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty . Notices . Any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty . All revocation notices by Guarantor shall be in writing and shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled "DURATION OF GUARANTY . " Any party may change its address for notices under this Guaranty by giving fonnal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address . Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty . No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Successors and Assigns . Subject to any limitations stated in this Guaranty on transfer of Guarantor's interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their successors nd assigns . Waive Jury . Lender and Guarantor hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Guarantor against the other . DEFINITIONS . The following capitalized words and terms shall have the following meanings when used in this Guaranty . Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America . Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require . Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such tenns in the Unifonn Commercial Code : Borrower. The word "Borrower" means CLIP INTERACTIVE, LLC and includes all co - signers and co - makers signing the Note and all their successors and assigns. GAAP. The word "GAAP" means generally accepted accounting principles. Guarantor. The word "Guarantor" means everyone signing this Guaranty, including without limitation JEFFREY THRAMANN, and in each case, any signer's successors and assigns. Guaranty. The word "Guaranty" means this guaranty from Guarantor to Lender. Indebtedness. The word "Indebtedness" means Borrower's indebtedness to Lender as more particularly described in this Guaranty. Lender. The word "Lender" means BANK OF THE WEST, its successors and assigns. Note . The word "Note" means and includes without limitation all of Borrower's promissory notes and/or credit agreements evidencing Borrower's loan obligations in favor of Lender, together with aH renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for promissory notes or credit agreements .

 
 

     

 

     

 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 2 certificate or passbook for the Collateral but shall have no other obligation to protect the Collateral or its value . In particular, but without llmitation, Lender shall have no responsibility (A} for the collection or protection of any income on the Collateral ; (B) for the preservation of rights against issuers of the Collateral or against third persons ; (C) for ascertaining any maturities, conversions, exchanges, offers, tenders, or similar matters relating to the Collateral ; nor (D} for informing the Granter about any of the above, whether or not Lender has or is deemed to have knowledge of such matters . DEFAULT . Each of the following shall constitute an Event of Default under this Agreement : Payment Default . Grantor fails to make any payment when due under the Indebtedness . Other Defaults . Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor . Default in Favor of Third Parties . Any guarantor or Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of any guarantor's or Grantor's property or ability to perform their respective obligations under this Agreement or any of the Related Documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Defective Collateralization . This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or Hen) at any time and for any reason . Insolvency . The dissolution of Grantor (regardless of whether election to continue is made), any member withdraws from the limited liability company, or any other termination of Grantor's existence as a going business or the death of any member, the insolvency of Granter, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor . Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness . This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute . Events Affecting Guarantor . Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness . Adverse Change . A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired . Insecurity . Lender in good faith believes itself insecure . RIGHTS AND REMEDIES ON DEFAULT . Upon the occurrence of an Event of Default, or at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any rights or remedies that may be available at law, in equity, or otherwise : Accelerate Indebtedness . Lender may declare all Indebtedness of Grantor to Lender immediately due and payable, without notice of any kind to Grantor . Application of Account Proceeds . Lender may take directly all funds in the Account and apply them to the Indebtedness . If the Account is subject to an early withdrawal penalty, that penalty shall be deducted from the Account before its application to the Indebtedness, whether the Account is with Lender or some other institution . Any excess funds remaining after application of the Account proceeds to the Indebtedness will be paid to Grantor as the interests of Granter may appear . Granter agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Account to the Indebtedness . Lender also shall have all the rights of a secured party under the Colorado Uniform Commercial Code, even if the Account is not otherwise subject to such Code concerning security interests, and the parties to this Agreement agree that the provisions of the Code giving rights to a secured party shall nonetheless be a part of this Agreement . Transfer Title . Lender may effect transfer of title upon sale of all or part of the Collateral . For this purpose, Grantor irrevocably appoints Lender as Grantor's attorney - in - fact to execute endorsements, assignments and instruments in the name of Grantor and each of them (if more than one) as shall be necessary or reasonable . Other Rights and Remedies . Lender shall have and may exercise any or all of the rights and remedies of a secured creditor under the provisions of the Colorado Uniform Commercial Code, at law, in equity, or otherwise . Deficiency Judgment If permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section . Election of Remedies . Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies . Cumulative Remedies . AU of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Granter under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies . ADDITIONAL PROVISIONS . The following provisions are made a part of this Agreement . To the extent of any conflict between the following provisions and any other provision in this Agreement, the following provisions shall control . 1. The Section headed RIGHT OF SETOFF is deleted in its entirety and replaced with the following: "To the extent permitted by applicable law, Lender reserves a right of setoff in the Account." 2. The subsection headed Financing Statements under the section headed MISCELLANEOUS PROVISIONS is revised to provide that any filing

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 3 fees, title transfer fees, and other fees and costs shall be paid by Borrower. 3. Subsection (c) of the section headed LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL is revised by inserting the word "and" immediately prior to the "(b)" and deleting subsection (c) in its entirety. 4. The section headed LIMITATIONS ON OBLIGATIONS OF LENDER is revised by inserting the clause, "unless otherwise agreed in writing or as provided pursuant to applicable law," in front of the word "Lender" in the 3rd line. 5. The subsection headed Attorneys' Fees; Expenses under the section headed MISCELLANEOUS PROVISIONS is revised by deleting the word "Granter" each place it appears and inserting in its place the term "Borrower". MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement . No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Grantor agrees to pay upon demand all of Lender's reasonable costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement . Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the reasonable costs and expenses of such enforcement . Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction}, appeals, and any anticipated post - judgment collection services . Grantor also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings . Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement . Governing Law . This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . This Agreement has been accepted by Lender in the State of Colorado . Choice of Venue . If there is a lawsuit, Granter agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement . No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Notices . Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, lf mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement . Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address . Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Granter is deemed to be notice given to all Granters . Power of Attorney . Grantor hereby appoints Lender as its true and lawful attorney - in - fact, irrevocably, with full power of substitution to do the following ; ( 1 ) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral ; ( 2 } to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral ; ( 3 } to settle or compromise any and a!! claims arising under the Collateral, and in the place and stead of Grantor, to execute and deliver its release and settlement for the claim ; and ( 4 } to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Granter, or otherwise, which in the discretion of Lender may seem to be necessary or advisable . This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender . Severability . If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance . If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable . If the offending provision cannot be so modified, it shall be considered deleted from this Agreement . Unless otherwise required by law, the illegality, invalidity, or unenforceabi!ity of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement . Successors and Assigns . Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns . If ownership of the Collateral becomes vested in a person other than Granter, Lender, without notice to Granter, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness . Survival of Representations and Warranties . Al! representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor's Indebtedness shall be paid in full . Time is of the Essence . Time is of the essence in the performance of this Agreement . Waive Jury . All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party . DEFINITIONS . The following capitalized words and terms shall have the following meanings when used in this Agreement . Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America . Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require . Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code : Account The word "Account" means the deposit account(s} described in the "Collateral Description" section .

 
 

     

 

     

 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 2 is required to provide notice regarding name changes. LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL . While this Agreement is in effect, Lender may retain the rights to possession of the Collateral, together with any and all evidence of the Collateral, such as certificates or passbooks . This Agreement will remain in effect until (a) there no longer is any Indebtedness owing to Lender : (b) all other obligations secured by this Agreement have been fulfilled ; and (c) Granter, in writing, has requested from Lender a release of this Agreement . LENDER'S EXPENDITURES . If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Granter fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may {but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral . Al! such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Granter . All such expenses wilt become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand ; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either ( 1 ) the term of any applicable insurance policy ; or ( 2 ) the remaining term of the Note ; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity . The Agreement also will secure payment of these amounts . Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default . LIMITATIONS ON OBLIGATIONS OF LENDER . Lender shall use ordinary reasonable care in the physical preservation and custody of any certificate or passbook for the Collateral but shall have no other obligation to protect the Collateral or its value . In particular, but without !imitation, Lender shall have no responsibility (A) for the collection or protection of any income on the Collateral ; (B) for the preservation of rights against issuers of the Collateral or against third persons ; (C) for ascertaining any maturities, conversions, exchanges, offers, tenders, or similar matters relating to the Collateral ; nor (D) for informing the Granter about any of the above, whether or not Lender has or is deemed to have knowledge of such matters . DEFAULT . Each of the following shall constitute an Event of Default under this Agreement Payment Default . Borrower fails to make any payment when due under the Indebtedness . Other Defaults . Borrower or Granter fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower or Granter . Default in Favor of Third Parties . Borrower, any guarantor or Granter defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's, any guarantor's or Grantor's property or ability to perform their respective obligations under this Agreement or any of the Related Documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or Granter or on Borrower's or Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Defective Collateralization . This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason . Death or Insolvency . The death of Borrower or Granter or the dissolution or termination of Borrower's or Grantor's existence as a going business, the insolvency of Borrower or Granter, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Granter . Creditor or Forfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Borrower or Granter or by any governmental agency against any collateral securing the Indebtedness . This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute . Events Affecting Guarantor . Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness . Adverse Change . A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired . Insecurity. Lender in good faith believes itself insecure. RIGHTS AND REMEDIES ON DEFAULT . Upon the occurrence of an Event of Default, or at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any rights or remedies that may be available at law, in equity, or otherwise : Accelerate Indebtedness . Lender may declare all Indebtedness of Borrower to Lender immediately due and payable, without notice of any kind to Borrower or Granter . Application of Account Proceeds . Lender may take directly all funds in the Account and apply them to the Indebtedness . If the Account is subject to an early withdrawal penalty, that penalty shall be deducted from the Account before its application to the Indebtedness, whether the Account is with Lender or some other institution . Any excess funds remaining after application of the Account proceeds to the Indebtedness will be paid to Borrower or Granter as the interests of Borrower or Granter may appear . Borrower agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Account to the Indebtedness . Lender also shall have all the rights of a secured party under the Colorado Uniform Commercial Code, even if the Account is not otherwise subject to such Code concerning security interests, and the parties to this Agreement agree that the provisions of the Code giving rights to a secured party shall nonetheless be a part of this Agreement . Transfer Title . Lender may effect transfer of title upon sale of all or part of the Collateral . For this purpose, Granter irrevocably appoints Lender as Grantor's attorney - In - fact to execute endorsements, assignments and instruments in the name of Granter and each of them {if more than one) as shall be necessary or reasonable . Other Rights and Remedies. Lender shall have and may exercise any or all of the rights and remedies of a secured creditor under the

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 3 provisions of the Colorado Uniform Commercial Code, at law, in equity, or otherwise . Deficiency Judgment. If permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section. Election of Remedies . Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies . Cumulative Remedies . All of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies . ADDITIONAL PROVISIONS. The following provisions are made a part of this Agreement. To the extent of any conflict between the following provisions and any other provision in this Agreement, the following provisions shall control. 1. The Section headed RIGHT OF SETOFF is deleted in its entirety and replaced with the following; "To the extent permitted by applicable law, Lender reserves a right of setoff in the Account." 2. The subsection headed Financing Statements under the section headed MISCELLANEOUS PROVISIONS is revised to provide that any filing fees, title transfer fees, and other fees and costs shall be paid by Borrower. 3. Subsection (c) of the section headed LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL is revised by inserting the word "and" immediately prior to the "(b)" and deleting subsection (c) in its entirety. 4. The section headed LIMITATIONS ON OBLIGATIONS OF LENDER is revised by inserting the clause, "unless otherwise agreed in writing or as provided pursuant to applicable law," in front of the word "Lender" in the 3rd line. 5. The subsection headed Attorneys' Fees; Expenses under the section headed MISCELLANEOUS PROVISIONS is revised by deleting the word "Grantor" each place it appears and inserting in its place the term "Borrower''. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement . No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Grantor agrees to pay upon demand all of Lender's reasonable costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement . Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the reasonable costs and expenses of such enforcement . Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection services . Granter also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Governing Law . This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of Jaw provisions . This Agreement has been accepted by Lender in the State of Colorado . Choice of Venue. lf there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado. Joint and Several Liability . All obligations of Borrower and Grantor under this Agreement shall be joint and several, and al! references to Granter shall mean each and every Granter, and all references to Borrower shall mean each and every Borrower . This means that each Borrower and Granter signing below is responsible for all obligations in this Agreement . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement . No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Notices . Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown· near the beginning of this Agreement . Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address . Unless otherwise provided or required by law, if there is more than one Granter, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors . Power of Attorney . Granter hereby appoints Lender as its true and lawful attorney - in - fact, irrevocably, with full power of substitution to do the following : ( 1 ) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral ; { 2 ) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral ; ( 3 ) to settle or compromise any and all claims arising under the Collateral, and in the place and stead of Grantor, to execute and deliver its release and settlement for the claim ; and ( 4 ) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otheiwise, which in the discretion of Lender may seem to be necessary or advisable . This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender . Severability . If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any

 
 

     

 

     

 

     

 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 2 is required to provide notice regarding name changes . LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL . While this Agreement is in effect, Lender may retain the rights to possession of the Collateral, together with any and all evidence of the Collateral, such as certificates or passbooks . This Agreement will remain in effect until (a) there no longer is any Indebtedness owing to Lender ; (b) all other obligations secured by this Agreement have been fulfilled ; and (c) Granter, in writing, has requested from Lender a release of this Agreement . LENDER'S EXPENDITURES . If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Granter fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Granter is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral . All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Granter . Ta the extent permitted by applicable law, all such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand ; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either ( 1 ) the term of any applicable insurance policy ; or ( 2 ) the remaining term of the Note ; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity . The Agreement also will secure payment of these amounts . Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default . LIMITATIONS ON OBLIGATIONS OF LENDER . Lender shall use ordinary reasonable care in the physical preservation and custody of any certificate or passbook for the Collateral but shall have no other obligation to protect the Collateral or its value . In particular, but without limitation, Lender shall have no responsibility (A) for the collection or protection of any income on the Collateral ; ( 8 ) for the preservation of rights against issuers of the Collateral or against third persons ; (C) for ascertaining any maturities, conversions, exchanges, offers, tenders, or similar matters relating to the Collateral ; nor (D) for informing the Granter about any of the above, whether or not Lender has or is deemed to have knowledge of such matters . DEFAULT . Each of the following shall constitute an Event of Default under this Agreement : Payment Default Borrower fails to make any payment when due under the Indebtedness . Other Defaults . Borrower or Granter fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower or Granter . Default in Favor of Third Parties . Borrower, any guarantor or Granter defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's, any guarantor's or Grantor's property or ability to perform their respective obligations under this Agreement or any of the Related Documents . False Statements . Any warranty, representation or statement made or furnished to Lender by Borrower or Granter or on Borrower's or Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter . Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Death or Insolvency . The death of Borrower or Granter or the dissolution or termination of Borrower's or Grantor's existence as a going business, the insolvency of Borrower or Granter, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Granter . Creditor or Folfeiture Proceedings . Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self - help, repossession or any other method, by any creditor of Borrower or Granter or by any governmental agency against any collateral securing the Indebtedness . This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender . However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Granter as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proce ding and if Borrower or Granter gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute . Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Adverse Change. A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender in good faith believes itself insecure. RIGHTS AND REMEDIES ON DEFAULT . Upon the occurrence of an Event of Default, or at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any rights or remedies that may be available at law, in equity, or otherwise : Accelerate Indebtedness. Lender may declare all Indebtedness of Borrower to Lender immediately due and payable, without notice of any kind to Borrower or Granter. Application of Account Proceeds . Lender may take directly all funds in the Account and apply them to the Indebtedness . If the Account is subject to an early withdrawal penalty, that penalty shall be deducted from the Account before its application to the Indebtedness, whether the Account is with Lender or some other institution . Any excess funds remaining after application of the Account proceeds to the Indebtedness will be paid to Borrower or Granter as the interests of Borrower or Grantor may appear . Borrower agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Account to the Indebtedness . Lender also shall have all the rights of a secured party under the Texas Uniform Commercial Code, even if the Account is not otherwise subject to such Code concerning security interests, and the parties to this Agreement agree that the provisions of the Code giving rights to a secured party shall nonetheless be a part of this Agreement . Transfer Title . Lender may effect transfer of title upon sale of all or part of the Collateral . For this purpose, Granter irrevocably appoints Lender as Grantor's attorney - in - fact to execute endorsements, assignments and instruments in the name of Granter and each of them (if more than one) as shall be necessary or reasonable . Other Rights and Remedies . Lender shall have and may exercise any or all of the rights and remedies of a secured creditor under the

 
 

Loan No: ASSIGNMENT OF DEPOSIT ACCOUNT (Continued) Page 3 provisions of the Texas Uniform Commercial Code, at law, in equity, or otherwise. Deficiency Judgment If permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section. Election of Remedies . Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies . Cumulative Remedies . All of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently . Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Granter under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies . ADDITIONAL PROVISIONS. The following provisions are made a part of this Agreement. To the extent of any conflict between the following provisions and any other provision in this Agreement, the following provisions shall control. 1. The Section headed RIGHT OF SETOFF is deleted in its entirety and replaced with the following: 'To the extent permitted by applicable law, Lender reseives a right of setoff in the Account" 2. The subsection headed Financing Statements under the section headed MISCELLANEOUS PROVISIONS is revised to provide that any filing fees, title transfer fees, and other fees and costs shall be paid by Borrower. 3. Subsection (c) of the section headed LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL is revised by inserting the word "and" immediately prior to the "(b)" and deleting subsection (c) in its entirety. 4. The section headed LIMITATIONS ON OBLIGATIONS OF LENDER is revised by inserting the clause, "unless otherwise agreed in writing or as provided pursuant to applicable law," in front of the word "Lender" in the 3rd line. 5. The subsection headed Attorneys' Fees; Expenses under the section headed MISCELLANEOUS PROVISIONS is revised by deleting the word "Granter" each place it appears and inserting in its place the term uBorrower''. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments . This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement . No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment . Attorneys' Fees ; Expenses . Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement . Lender may hire or pay someone else to help enforce this Agreement, and Granter shall pay the costs and expenses of such enforcement . Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including lender's reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post - judgment collection services . Granter also shall pay all court costs and such additional fees as may be directed by the court . Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Governing Law . With respect to procedural matters related to the perfection and enforcement of Lender's rights against the Collateral, this Agreement will be governed by federal law applicable to Lender and to the extent not preempted by federal law, the laws of the State of Texas . In all other respects, this Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Colorado without regard to its conflicts of law provisions . However, if there ever is a question about whether any provision of this Agreement is valid or enforceable, the provision that is questioned will be governed by whichever state or federal law would find the provision to be valid and enforceable . The loan transaction that is evidenced by the Note and this Agreement has been applied for, considered, approved and made, and all necessary loan documents have been accepted by Lender in the State of Colorado . Choice of Venue. If there is a lawsuit, Granter agrees upon Lender's request to submit to the jurisdiction of the courts of Adams County, State of Colorado. Joint and Several Liability . All obligations of Borrower and Granter under this Agreement shall be joint and several, and all references to Granter shall mean each and every Granter, and all references to Borrower shall mean each and every Borrower . This means that each Borrower and Granter signing below is responsible for all obligations in this Agreement . No Waiver by Lender . Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender . No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right . A waiver by lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement . No prior waiver by lender, nor any course of dealing between Lender and Granter, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions . Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender . Notices . Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement . Any party may change Its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address . For notice purposes, Granter agrees to keep Lender informed at all times of Grantor's current address . Unless otherwise provided or required by law, if there is more than one Granter, any notice given by Lender to any Granter is deemed to be notice given to all Granters . Power of Attorney . Granter hereby appoints lender as its true and lawful attorney - in - fact, irrevocably, with full power of substitution to do the following : ( 1 ) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral ; ( 2 ) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral ; ( 3 ) to settle or compromise any and all claims arising under the Collateral,

 
 

     

 

     

Exhibit 10.8

 

LICENSE AND SERVICES AGREEMENT

 

 

This License and Services Agreement (this “Agreement”), is made and entered into as of this 1st day of March, 2019 (the “Effective Date”), by and between Clip Interactive, LLC, a Colorado limited liability company, (“Clip”) and XXXXX.

 

RECITALS:

 

A.          Clip is in the business of providing certain technology and marketing services (“Hosted Application Services”) related to the development, execution, commercialization and optimization of interactive applications and web players that interact with radio programming to provide certain enhanced content and information generated from Clip’s proprietary audio monitoring and digital conversion technology (“Enhanced Content”);

 

B.            XXXXXX is in the business of owning and operating radio stations (collectively, the “XXXXX Stations”), through which XXXXX sells products, advertising space, or other services, or otherwise generates and receives certain advertising revenue (“Ad Revenue”);

 

C.            XXXXX is responsible for securing and coordinating Hosted Application Services for its Affiliate, Reach Media, (the “Reach Media”);

 

D.            XXXXX desires to engage Clip to provide those Hosted Application Services and develop and maintain those Clip Apps as set forth on Exhibit A, attached hereto and incorporated herein, in order to increase Ad Revenue, in accordance with the terms and conditions set forth in this Agreement;

 

E.            The Hosted Application Services shall be provided to Reach Media, Inc., an XXXXX Affiliate, in order that Reach Media’s syndicated programming is provided as Enhanced Content via the Reach Syndicated Program Applications as set forth on Exhibit A (the “Reach Syndicated Programing Applications”). Reach Media. Reach Media

 

F.            As of the Effective Date set forth above, the License and Service Agreement previously entered into by XXXXX and Clip with an effective date of March 4th, 2017 (the “Prior Agreement”) shall be superseded by this Agreement and shall have no force or effect going forward.

 

AGREEMENT:

 

NOW, THEREFORE, the parties agree:

 

1.             DEFINED TERMS. Capitalized terms and phrases used in this Agreement shall have the meanings set forth below. Additional terms may be defined throughout this Agreement and in the Exhibits hereto.

 

Advertiser Campaigns” means any revenue generating advertiser or sponsorship campaign that utilizes the Clip Apps and web players as part of their broadcast or digital execution. These include revenue generating Clip enabled broadcast ads, streaming audio ads, sponsorships, digital only ads, promotions or contests that are generating revenues for XXXXX stations and the Reach Media.

 

“Reach Media” means an affiliated entity of XXXXX, Inc. that is permitted to access the Services hereunder.

 

 

 

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"Enhanced Content" means all content created by or originating from XXXXX stations and adapted or modified for use, distribution or display with Clip Apps utilized by XXXXX.

 

Affiliate” means, with respect to a party, any person or entity directly controlling, controlled by or under common control with, such party.

 

Clip Apps” means the iOS and Android mobile applications developed by Clip, which deliver the Hosted Application Services. Clip Apps specifically include the Station Apps and Reach Syndicated Program Applications.

 

IP Rights” means all patents, trademarks (and associated goodwill therewith), trade secret rights, know how, copyrights and other forms of intellectual property rights and protections throughout the world, whether currently existing or hereafter developed or acquired and whether now known or hereafter recognized, including, without limitation, any Internet domain names.

 

Law” means any applicable law, statute, ordinance, code, rule, regulation, order, judgment, decree, requirement or procedure enacted, adopted, applied, enforced or followed by any governmental authority.

 

Platform Fees” means monthly fee payments to Clip for the ongoing services support to XXXXX sales and programming teams as well as for content recognition, hosting, updates and enhancements to the applications and web player. Platform Fees are set forth on Exhibit A.

 

“Reach Media Syndicated Sites” means the websites associated with each Reach Syndicated Program Application.

 

Related Parties” means any owner, parent, partner, Affiliate subsidiary, agent, subcontractor, director, officer, hired or leased employee or worker, agent, representative or permitted assignee or successor of XXXXX or Clip, as the case may be and as the context requires.

 

Representatives” mean a party’s employees, officers, directors, advisors, service providers, Affiliates and agents.

 

Specifications” means (a) the functional, component performance, system performance, interface, compatibility, design characteristics, features, specifications, operational and technical criteria or other requirements of the Clip Apps identified in documentation provided to XXXXX and incorporated within this Agreement by this reference; and (b) any mutually agreed upon specifications, requirements, criteria, features, or functionality of any Enhanced Content.

 

Subscribers” means members of the public that download and subscribe to a Clip App in connection with any XXXXX Station.

 

Web Players” means the web accessible interfaces developed by Clip, which deliver the Hosted Application Services.

 

 

 

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2. SERVICES.

 

2.1           General. During the Term, Clip shall use commercially reasonable efforts to develop, customize, implement, host and support and manage the Clip Apps, Web Players and Enhanced Content to ensure the Enhanced Content available to Subscribers or potential Subscribers via the Clip Apps and Web Players pursuant to the terms of this Agreement and the Statement of Work attached as Exhibit A (the “Hosted App Services”). Additionally, Clip agrees to provide XXXXX and the Reach Media with all fixes, improvements, updates and upgrades (“Upgrades”) to the Hosted App Services, free of charge, to the extent such Upgrades are made available free of charge by Clip to other customers.

 

2.2           Updated App or Enhanced Content. From time to time during the Term of the Agreement and within ten (10) business days of receipt of XXXXX's written request for any Clip App update or Enhanced Content that is not immediately offered by Clip, or self-administrated through Clip's Content Management System (“CMS”), Clip shall confirm whether it is able to make the requested changes in the functionality of the Clip Apps and Web Players or Enhanced Content, and provide a proposed deployment date (the “Target Deployment Date”) and, if agreed to by XXXXX, shall provide the modified Clip Apps and/or Enhanced Content to XXXXX at least three (3) business days before the Target Deployment Date for such Clip App or Enhanced Content for XXXXX’s review and acceptance testing, pursuant to the procedures set forth in Section 2.4. Upon Acceptance by XXXXX, Clip shall promptly make such Clip Apps and/or Enhanced Content available in accordance with this Agreement. XXXXX shall deliver any updates to its content at least ten (10) business days prior to the Target Deployment Date. Content means the content created by or originating from XXXXX stations or the Reach Media for use, distribution or display with Clip Apps utilized by XXXXX and the Reach Media. Each update cycle requires ten business days to complete. The latest published revisions of coverage in Clip’s coverage database are included in these updates.

 

2.3 Professional Services.

 

2.3.1        Statements of Work. During the Term, Clip will perform certain consulting, development, integration services and/or other services at the request of XXXXX (“Professional Services” and together with the Hosted Application Services, the “Services”) for XXXXX as described in any Statements of Work agreed to by the parties. All such work will be performed in a competent, timely and professional manner consistent with recognized industry standards Each Statement of Work shall be executed by the parties and include a description of the Services to be performed, identification of, and completion dates for, all deliverables to be completed and provided by Clip and any resulting fees (“Deliverables”). The initial Statement of Work is attached as Exhibit A.

 

2.4           Review, Testing and Acceptance. Upon the completion of each Deliverable or other work product, including, without limitation, any Enhanced Content, Clip shall deliver such Deliverable to XXXXX. XXXXX shall have a period of ten (10) business days after receipt of the Deliverable from Clip (the “Acceptance Test Period”) to review and test the Deliverable to determine whether the same complies in all material respects with the requirements of this Agreement, the Specifications and the Statement of Work.

 

2.4.1        Acceptance. If XXXXX determines in its reasonable good faith judgment, that the Deliverable complies in all material respects with the requirements of this Agreement, the Specifications and the Statement of Work, then XXXXX shall accept the same by delivering a written notice of acceptance to Clip (“Acceptance” or “Accept”) within 3 business days of the expiration of the Acceptance Test Period. Failure to provide Acceptance within the prescribed time shall not be deemed an acceptance by XXXXX.

 

2.4.2         Defects. If XXXXX discovers a defect with respect to any Deliverable or any other failure of the same to comply in all material respects with the requirements of this Agreement, the Specifications and the Statement of Work, XXXXX shall send a notice to Clip describing the defect in reasonable detail (the “Defect Notice”). After receipt of the Defect Notice, Clip promptly shall remedy such defects and resubmit the Deliverable to XXXXX for an additional testing period. The length of such additional testing period shall be ten (10) business days from the receipt of the Defect Notice.

 

 

 

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3. LICENSES; ENHANCED CONTENT.

 

3.1 Grant of License By Clip.

 

3.1.1        Clip Apps. During the Term, Clip hereby grants to XXXXX and the Reach Media a limited, revocable, non-exclusive, non-transferable right and license to: (a) use, operate, maintain, distribute and display the Enhanced Content via the Clip Apps; and (b) sublicense and/or otherwise grant Subscribers or potential Subscribers of XXXXX the right to use the Clip Apps as needed in order to permit such Subscribers or potential Subscribers to access, view, and use the Enhanced Content.

 

3.1.2        Distribution. During the Term, Clip will provide XXXXX and the Reach Media with online locations at which the Clip Apps are available (collectively, the “Landing Pages”). In its sole discretion, XXXXX may: (a) include links to the Landing Pages from XXXXX’s web sites, (b) publish the Landing Pages URLs on marketing and promotional materials; and/or (c) provide the URLs for the Landing Pages to such resellers and retailers as XXXXX may designate from time to time (“Authorized Third Parties”) who, in turn, may include the links to the Landing Page at the websites of such Authorized Third Parties.

 

3.1.3        Restrictions. Except as otherwise set forth in this Agreement, neither XXXXX, nor Reach Media will, and will not authorize its Representatives to: (a) modify, translate, reverse engineer, decompile, or disassemble the Clip Apps; (b) copy the Clip Apps; or (c) remove any proprietary notices or labels on or in the Landing Page, if any. Notices or labels shall be defined any written disclaimers, rules, restrictions or permission requirements about content.

 

3.2           Transfer of License. In the event of a sale or change of control of a XXXXX Station Site, or a Reach Media Syndicated Site, XXXXX and the Reach Media shall each have the right to transfer their respective license to: (a) use, operate, maintain, distribute and display the Enhanced Content via the Clip Apps or (b) sublicense and/or otherwise grant Subscribers or potential Subscribers of XXXXX the right to use the Clip Apps as needed in order to permit such Subscribers or potential Subscribers to access, view, and use the Enhanced Content.

 

3.3 Grant of License By XXXXX.

 

3.3.1        XXXXX Marks. Subject to the terms and conditions of this Agreement, during the Term of this Agreement, XXXXX grants to Clip a limited, non-exclusive, non-transferable, non sub licensable, royalty-free license to use the trade names and service marks of XXXXX that XXXXX designates and provides to Clip for display on the Landing Pages and Enhanced Content and in the Clip Apps (collectively, the “XXXXX Marks”) utilized by or on behalf of XXXXX.

 

3.3.2        XXXXX Approval. Clip will not, nor will Clip authorize any third party to, make use of XXXXX Marks unless and until each instance of such use has been approved in writing by XXXXX (which may be provided by XXXXX by email). Clip shall furnish to XXXXX for its written approval all materials prepared by or on behalf of Clip relating to this Agreement that include any XXXXX Marks. XXXXX shall have a period of not less than ten (10) business days to respond to such request for approval (“Approval Period”). If XXXXX fails to approve in writing any request during the Approval Period, such request shall be deemed denied. All approvals granted in accordance herewith shall (a) be valid solely during the term specified by XXXXX, (b) be limited to the specific purpose for which approval was sought and received and (c) subject to Clip’s obligations hereunder, be deemed a limited, non-exclusive, non-transferable, revocable right and license, without right to sublicense, to use the specific XXXXX Marks for the use approved by XXXXX, which right and license shall terminate and revert to XXXXX contemporaneously with the expiration of this Agreement or upon any earlier termination thereof, as applicable. All such uses shall be in accordance with the procedures and guidelines provided to Clip by XXXXX from time to time.

 

 

 

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3.4           During the Term, XXXXX and Reach Media hereby grants to Clip a limited, revocable, non- exclusive, non-transferable, non sub licensable right and license to: (a) incorporate the Content within the Clip Apps solely to operate, maintain, distribute and display the Content via the Clip Apps for XXXXX and Subscribers of XXXXX and (b) enhance the content at the request of XXXXX. Use of Content and Enhanced content by Clip shall be solely as needed in order to permit Subscribers of XXXXX to access, view, and use the Enhanced Content. No other use shall be made of the Enhanced Content or Content by Clip, without first securing XXXXX’s express written permission.

 

3.5           All rights in the Enhanced Content, Content and XXXXX Marks not expressly granted to Clip pursuant to this Section 3.3, are reserved by XXXXX and Reach Media.

 

3.6           Obligations Upon Termination. Within ten (10) days after the date of expiration or termination of this Agreement, (i) Clip shall cease using (and direct any person under its control to not use) the XXXXX Marks on the Clip Apps and Enhanced Content and (ii) the license granted to XXXXX by Clip in Section 3.1 shall terminate on such date of expiration or termination.

 

4. OWNERSHIP.

 

4.1           Enhanced Content. Subject to Section 4.2 below, all Enhanced Content is and shall be considered a work made for hire for XXXXX (or as the case may be the Adopting Affiliate) as such term is defined in Section 101 of the Copyright Act of 1976, as amended. If and to the extent that the Enhanced Content (or any portion thereof) is not deemed to be a work made for hire, Clip shall, and hereby does, exclusively and irrevocable assign, transfer and otherwise convey to XXXXX all right, title, and interest in and to the Enhanced Content, including all rights of copyright or other intellectual property rights pertaining thereto. XXXXX retains ownership of all Content (enhanced or otherwise) together with all IP Rights contained therein. Notwithstanding the foregoing, Clip will retain ownership to all pre-existing Clip materials and content (and all IP Rights therein).

 

4.2           Clip Apps. As between the parties, Clip shall retain all title, copyright and all other IP Rights in the Clip Apps and any modifications, enhancements and derivative works thereto. XXXXX does not acquire any right, express or implied, in the Clip Apps, other than those specified in this Agreement and nothing in this Agreement is intended to confer, by implication, estoppel or otherwise, upon XXXXX a license to or any rights in any IP Rights of Clip.

 

4.3          Clip IP. XXXXX acknowledges that the Clip Apps and any other patent, trade secret and proprietary rights in connection with the proprietary software used to develop, and embodied within, the Clip Apps, including the object code and the source code for such software, along with all ideas, methods, algorithms, formulae and concepts used in the development of such software and any modifications, enhancements or derivative works to the software (“Clip Proprietary Software”), including all techniques and concepts that were conceived or first produced by Clip in the performance of this Agreement, including any such techniques that are included within any Enhanced Content constitute “Clip IP” and remain the sole and exclusive property of Clip.

 

4.4           Other Clip Intellectual Property. Notwithstanding the foregoing, in the event XXXXX provides a new feature in respect of the Clip Apps or Hosted App Services that is proprietary to XXXXX and not currently in use by Clip (or contemplated for future use by Clip provided by XXXXX that the applicable SOW designates as intellectual property owned by XXXXX, such XXXXX intellectual property will be owned by XXXXX.

 

4.4.1        Third Party Materials. To the extent that any materials owned by or licensed from third parties, other than the XXXXX Marks, (the “Third Party Materials”) are included in any Enhanced Content, Clip shall obtain for XXXXX, at Clip’s sole cost and expense, a perpetual, irrevocable, worldwide license to: (a) use, reproduce, distribute, publicly perform, publicly display, modify and prepare derivative works of such Third Party Materials; and (b) sublicense any of the foregoing rights

 

 

 

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5. PAYMENT.

 

5.1           Platform Service & Support Fees for Station Applications: In consideration of the Hosted App Services, commencing as of the Initial Deployment Date, XXXXX shall pay Clip a monthly Platform Services and Support Fee of $250 per station. These fees cover all on-going Clip App and Web Player services and support for the duration of the Term. XXXXX may, in its sole discretion, elect to add an additional station and any additional stations will be charged the per station fee set forth herein. If XXXXX elects to delete station(s) utilizing the Hosted App Services the monthly Platform Services and Support Fee shall be reduced by $250.00 per each deleted station.

 

5.2           Platform Service & Support Fees for Reach Syndicated Program Applications: In consideration of the Hosted App Services for Reach Media Reach Syndicated Program applications commencing as of the Initial Deployment Date, XXXXX shall pay Clip a monthly Platform Services and Support Fee of $250 minimum, per Reach Syndicated Program Application. The monthly service and support fee is set forth on Exhibit A, Section 12. If XXXXX elects to delete Reach Syndicated Program Applications utilizing the Hosted App Services, the fees for Hosted App Services for the Reach Syndicated Program Applications will be reduced by $250.00 per deleted Reach Syndicated Program Application.

 

5.3           Platform Fee Payments: Following the Initial Deployment Date, XXXXX shall pay to Clip the monthly Platform Services and Support Fees by the 15th of each month, as set forth in an invoice that will be delivered at the 1st of the calendar month.

 

5.4           Advertiser Campaign Fees: Clip is waiving all ad campaign fees for XXXXX.

 

5.5           Advertiser Campaign Fee Payments: Clip is waiving all ad campaign fees for XXXXX.

 

5.6           Disputed amounts shall be paid within ten (10) business days of resolution of such dispute. Adjustment for any billing errors or Service Level Credits (as defined on the Service Level Agreement attached as Exhibit B hereto) shall be made monthly.

 

5.7           Audit. For a period of three (3) years after the expiration or termination of this Agreement, Clip shall maintain complete and accurate records to substantiate payments made or due hereunder. XXXXX shall have the right to inspect, copy, verify and audit such books and records at any time upon two (2) weeks’ prior written notice to the other party. Clip will reimburse the auditing party for any reasonable, documented expenses incurred by such auditing party in connection with any audit, which results in the correction of a billing error by Clip in an amount greater than 5% of the charges that were subject to such audit for the period audited.

 

6. REPRESENTATIONS, WARRANTIES AND COVENANTS; DISCLAIMER.

 

6.1 Title. Clip hereby represents, warrants and covenants to XXXXX as of the Effective Date that:

 

6.1.1 The Clip Apps do not and shall not infringe any third party’s IP Rights.

 

6.1.2        Clip's performance of the Hosted Application Services does not and will not infringe any third party’s IP Rights.

 

6.1.3        There are no allegations, claims, suits, actions, investigations or proceedings against Clip (each a “Claim”) or any threatened Claims asserting that the Clip Apps infringe or violate any third party’s IP Rights.

 

 

 

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6.1.4        Clip has not previously granted any rights in the Clip Apps, work product or Hosted Application Services to any third party that are inconsistent with the rights granted herein to XXXXX.

 

6.1.5        The enhancements made to the Enhanced Content do not and shall not infringe any third party’s IP Rights.

 

6.1.6        The Hosted Application Services do not and shall not infringe any third party’s IP Rights.

 

6.2                Exclusive Warranties; Disclaimer. EXCEPT AS PROVIDED IN SECTION 3 THROUGH 10 OF EXHIBIT A, THE SERVICE LEVEL AGREEMENT AND THE DOCUMENTATION, THE CLIP APPS, ENHANCED CONTENT OR THE LANDING PAGES AND DOCUMENTATION ARE PROVIDED “AS IS,” AND CLIP MAKES NO (AND HEREBY DISCLAIMS ALL) OTHER WARRANTIES, REPRESENTATIONS, OR CONDITIONS, WHETHER WRITTEN, ORAL, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF SATISFACTORY QUALITY, COURSE OF DEALING, TRADE USAGE OR PRACTICE, MERCHANTABILITY, TITLE, NONINFRINGEMENT, OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE USE, MISUSE, OR INABILITY TO USE THE CLIP APPS, ENHANCED CONTENT OR THE LANDING PAGES, OR DOCUMENTATION (IN WHOLE OR IN PART) OR ANY OTHER PRODUCTS OR SERVICES PROVIDED TO XXXXX BY CLIP. CLIP DOES NOT WARRANT THAT ALL ERRORS CAN BE CORRECTED, OR THAT OPERATION OF THE CLIP APPS, ENHANCED CONTENT OR THE LANDING PAGES SHALL BE UNINTERRUPTED, SECURE, OR ERROR-FREE. SOME STATES AND JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES OR CONDITIONS OR LIMITATIONS ON HOW LONG AN IMPLIED WARRANTY LASTS, SO SOME OF THE ABOVE LIMITATIONS MAY NOT APPLY.

 

7. INDEMNIFICATION.

 

7.1                Indemnification by Clip. Clip shall indemnify, defend and hold harmless XXXXX and its Related Parties from and against any and all losses, settlements, claims, actions, suits, proceedings, investigations, judgments, awards, damages and liabilities actually suffered or incurred (collectively, “Losses”), and shall reimburse XXXXX for any and all legal, accounting and other fees, costs and expenses reasonably incurred in connection with investigating, mitigating or defending any such Loss (collectively, “Expenses”), in each case, which Losses or Expenses are sustained or incurred by any of them and arise out of (a) a third party allegation that the Clip Apps, Enhanced Content or the Hosted Application Services, or the use thereof, infringes or constitutes a wrongful use of any third party IP Right, right of privacy or publicity or similar right (collectively, a “Claim of Infringement”) or (b) any other third party claim caused by, relating to or arising out of an alleged breach by Clip of any term, representation, warranty or covenant of this Agreement by Clip.

 

7.2                Indemnification by XXXXX. XXXXX shall indemnify, defend and hold harmless Clip and its Related Parties from and against any and all Losses and Expenses that are sustained or incurred by or asserted against any of them and arise out of (a) any Claim of Infringement in connection with the XXXXX Marks or any content or programming provided by XXXXX (exclusive of any enhancements made by Clip, or the Content and Enhanced Content); or (b) any third party claim caused by, relating to or arising out of an alleged breach by XXXXX of any term, representation, warranty or covenant of this Agreement by XXXXX.

 

7.3 Remedies and Limitations; Combinations.

 

7.3.1                      Remedies. Without limiting Clip’s foregoing indemnification obligations, in the event of any third party Claim of Infringement, or if Clip becomes aware of any impending Claim of Infringement, Clip may, at its option and expense; (a) procure for XXXXX, at no cost to XXXXX, the right to continue to use such Clip Apps; (b) replace or modify the Clip Apps; or (c) terminate the licenses under this Agreement and refund to XXXXX any Revenue Share paid for the Clip Apps that are applicable for the period of time following the date of the Claim of Infringement.

 

 

 

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7.4                Indemnification Process. In the event that a party is entitled to indemnification pursuant to this Section, the party seeking indemnification (the “Indemnified Party”) shall provide the party from which indemnification is sought (the “Indemnifying Party”) with: (a) prompt written notification of any such Losses; (b) sole control and authority over the defense or settlement thereof ;and (c) all available information and reasonable assistance necessary to settle and/or defend any such Losses, at the Indemnifying Party’s expense, provided that if any settlement requires any action or admission by the Indemnified Party, then the settlement will require the Indemnified Party’s prior written consent. Failure by an Indemnified Party to provide prompt notice of a Loss or to provide such control and authority or information and assistance, shall not relieve the Indemnifying Party of its obligations, except to the extent that the Indemnifying Party is materially prejudiced by such failure. The Indemnified Party may have its own counsel present at and participating in all proceedings or negotiations relating to a Loss, at Indemnified Party’s own expense.

 

8. LIMITATION OF LIABILITY

 

8.1                General. IN NO EVENT SHALL ANY PARTY BE LIABLE TO ANOTHER PARTY UNDER THIS AGREEMENT, OR TO ANY RELATED PARTY OF SUCH PARTY, FOR ANY INCIDENTAL, CONSEQUENTIAL, INDIRECT, SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES, (EVEN IF PREVIOUSLY APPRISED OF THE POSSIBILITY THEREOF), WHETHER THE BASIS OF THE LIABILITY IS BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE AND STRICT LIABILITY), STATUTES, OR ANY OTHER LEGAL THEORY. EACH PARTY’S’ CUMULATIVE LIABILITY UNDER ANY AND ALL CLAIMS FOR LOSS OR LIABILITY BASED UPON, ARISING OUT OF, RESULTING FROM, OR IN ANY WAY CONNECTED WITH THE PERFORMANCE OR BREACH OF THIS AGREEMENT, SHALL IN NO CASE EXCEED THE AGGREGATE DOLLAR AMOUNT ACTUALLY PAID BY XXXXX TO CLIP HEREUNDER.

 

8.2                Exclusions. THE FOREGOING LIMITATIONS OF LIABILITY SHALL NOT APPLY WITH RESPECT TO ANY OF THE FOLLOWING: (A) A PARTY’S INDEMNIFICATION OBLIGATIONS HEREUNDER; (B) A BREACH BY A PARTY OF ITS CONFIDENTIALITY OBLIGATIONS HEREUNDER; OR (C) ANY DAMAGES RESULTING FROM A PARTY’S FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

9. CONFIDENTIALITY AND MEDIA RELEASES

 

9.1                Confidential Information. As used in this Agreement, the term “Confidential Information” shall mean any and all information prepared or delivered to the receiving party by the disclosing party or its Representatives (including information or data received by the disclosing party from a third party and as to which the disclosing party has confidentiality obligations), that (a) is marked or designated by the disclosing party as “confidential” or “proprietary,” (b) is disclosed orally or visually provided that such information is identified at the time of such disclosure as proprietary or confidential, and that within thirty (30) days thereafter a written summary of such oral and visual disclosure bearing the aforesaid type of label or legend, is provided to the receiving party or (c)  is known to the receiving party, or should be known to a reasonable person given the facts and circumstances of the disclosure, as being treated as confidential or proprietary by the disclosing party. The terms of this Agreement shall constitute the Confidential Information of both parties.

 

9.2                Treatment of Confidential Information. The receiving party shall keep in strictest confidence and trust all Confidential Information of the disclosing party and shall not (a) except as expressly provided herein, disclose any such Confidential Information to any other entity or person other than a recipient’s Representatives or (b) use such Confidential Information except and solely for the performance of each party’s respective obligations hereunder. The receiving party will not use any Confidential Information of the disclosing party for any purpose not expressly permitted by this Agreement and will disclose the Confidential Information of the disclosing party only to the receiving party’s Representatives who have a need to know such Confidential Information for purposes of this Agreement and only after the receiving party has notified such Representatives that such information is the Confidential Information of the disclosing party. The receiving party shall use at least the same care and discretion to avoid disclosure of the disclosing party’s Confidential Information as it uses with its own similar Confidential Information, and in no event with less than reasonable care. The obligations of the parties pursuant to this Agreement shall terminate on that date which is two (2) years after the date of this Agreement. “Confidential Information” does not include information that demonstrably (a) is or becomes generally available to the public other than as a result of a disclosure by the receiving party, (b) was possessed by the receiving party prior to being furnished by the disclosing party, provided that the source of such information was not known by the receiving party to be bound by a confidentiality agreement with, or other obligation of confidentiality to, the disclosing party or any other party with respect to such information, (c) is independently developed by the receiving party without use of or reference to the Confidential Information of the disclosing party and without breach of this Agreement or (d) becomes available to the receiving party from a source other than the disclosing party, provided that such source is not known by the receiving party to be bound by a confidentiality agreement with, or other obligation of confidentiality to, the disclosing party or any other party with respect to such information. Further, it shall not be a violation of Section 9.2 for a party to disclose Confidential Information of the other party in response to a subpoena or other legal process served upon the receiving party or where applicable Law requires the disclosure of such information, provided that, if not prohibited under applicable law, the receiving party gives reasonable prior written notice to the disclosing party sufficient to permit the disclosing party to seek a protective order if it so chooses and discloses only that information that is legally required to be disclosed.

 

 

 

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9.3                Remedies. Each of the parties acknowledges and agrees that the other would be irreparably harmed if any Confidential Information of the disclosing party were to be disclosed to third parties, or if any use were to be made of such Confidential Information other than that permitted under this Agreement, and further agrees that the disclosing party shall have the right to seek injunctive relief upon any violation or threatened violation of the terms of this Section 9, in addition to all other rights and remedies available at law or in equity, without having to post a bond or other security.

 

9.4                Return of Confidential Information. Upon the termination, cancellation or expiration of this Agreement for any reason or upon the reasonable request of the disclosing party, all Confidential Information, together with any copies that may be authorized herein, shall be returned to the disclosing party or, if requested by the disclosing party, certified destroyed by the receiving party; provided, however, that this Section 9.5 shall not apply with respect to Confidential Information which is needed in connection with the use, installation and support of the Clip Apps.

 

9.5                No License. Except as explicitly set forth herein, nothing in this Agreement is intended to or shall grant to either party any license or other right of any nature to the use of any Confidential Information of the other or any intellectual property rights relating to the Confidential Information of the other.

 

10. TERM AND TERMINATION

 

10.1             Term. This Agreement shall be effective as of the Effective Date and shall continue for a period of two (2) years following the Initial Deployment Date, (the “Initial Term”), unless earlier terminated as provided herein. XXXXX may elect to renew the Agreement for two (2) consecutive one (1) year periods by providing notice to Clip within thirty (30) days prior to the end of the then current term (each a “Renewal Term”). The fees set forth in this Agreement shall apply to each Renewal Term, unless otherwise mutually agreed to by the parties. word “Term” as used herein shall be deemed to consist of the Initial Term and any such Renewal Terms for purposes of this Agreement.

 

10.2 Termination of Agreement. Either party may terminate this Agreement:

 

10.2.1      If the other party makes an assignment for the benefit of creditors or if the other party ceases to do business or otherwise terminates its business operations, other than after an assignment, which is permitted by the terms of this Agreement.

 

10.2.2            If the other party becomes insolvent, or voluntary or involuntary proceedings are instituted by or against such other party under any federal, state, or other bankruptcy or insolvency Laws, and, in the case of proceedings commenced against such party, such proceedings are not terminated within sixty (60) days, or a receiver is appointed for such other party.

 

10.2.3            If the other party fails to perform any material provision of this Agreement and does not cure such failure within a period of thirty (30) business days after receipt of notice from the other party reasonably specifying such failure, or if such failure cannot reasonable be cured within such thirty (30) business day period, the other party fails to (i) promptly commence to remedy such failure, (ii) continuously and diligently pursue the remedy of such failure, and (iii) cure such failure within a period of thirty (30) calendar days after receipt of the notice of failure (or such other time period as agreed upon by the parties).

 

10.2.4            At any time XXXXX may terminate this agreement by providing Clip with written notice thirty (30) days in advance of the specified termination date

 

 

 

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10.2.5              Transition Period. Clip shall work in cooperation and in a timely manner with XXXXX and Adopted Affiliate to support XXXXX or its designee to provide the Transition Services, and shall not act in a manner so as to impede or delay XXXXX’s transition efforts. Absent CLIP’s and XXXXX’s written agreement such transition shall not extend for a period of more than thirty (30) days following the expiration or termination of the Agreement (the “Transition Period”).

 

11. MINIMUM SERVICE LEVEL COMMITMENTS

 

11.1          In the event Clip is unable to continue maintenance and servicing of XXXXX’s Clip Apps or Web Players, such as due to occurrence of one of the scenarios defined in Sections 10.2.1 or 10.2.2 or due to an inability of Clip to continue to fully operate the business financially or operationally, Clip guarantees the following minimum service level commitments set forth in Sections 11.2 through 11.4 below for the applications provided to XXXXX for a minimum of (90) days from the time of written notification to XXXXX of such a forthcoming event:

 

11.2 Monthly Uptime Standard: The Hosted App Service shall be available to XXXXX twenty-four (24) hours a day, seven (7) days per week, ninety-nine percent (99.9%) of the time, calculated on a monthly basis (“Monthly Uptime Standard”) as described in Exhibit B: Service Level Agreement.

 

11.3             App Store & Developer Keys: XXXXX’s Clip Apps will remain functional in the iOS and Android App stores and the existing developer account keys will be given to XXXXX for future administration rights.

 

11.4               Feature/Functionality Continuation: The following features will remain fully functional in XXXXX applications and web players audio streaming, audio podcast download, 3rd party ad serving, 3rd party integrated content feeds and/or any 3rd party link/ULR that has been integrated into the application that is hosted and managed by a party other than Clip for a minimum of 12 months from the time of written notification to XXXXX of such a forthcoming termination event as set forth.in section 10.2.

 

11.5             Existing User Database: All existing XXXXX user database information in Clip’s possession will be transferred to XXXXX programming and/or digital administration team(s) in a manner and frequency as requested by XXXXX, so that future contact and communication with the user base can be assured regardless of Clip’s continued operation of the applications beyond the initial Term.

 

11.6             Other Features/Functionality: The continuation of features and functionality within XXXXX’s Clip Apps and Web Players, other than those described in Sections 11.2 through 11.4 above, will be at Clip’s sole discretion, if such a situation arises where Clip is unable to maintain full operational capacity of all features and functionality of these applications.

 

 

 

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12. NOTICES

 

Except as provided in any express provision of this Agreement, any notice, request, approval, authorization, consent, demand or other communication required or permitted to be given or made pursuant to this Agreement shall be in writing (except where oral notice is specifically authorized in this Agreement) and shall be deemed given on the earliest of (a) actual receipt, irrespective of the method of delivery, (b) on the delivery day following dispatch if sent by express mail (or similar next day air courier service) or (c) on the sixth (6th) day after mailing by registered or certified United States mail, return receipt requested, postage prepaid and addressed as follows:

 

  If to XXXXX: XXXXX, Inc.
    1010 Wayne Ave.
    14th Floor
    Silver Spring, MD 20910
    Attn: General Counsel
     
    With a copy to:
    Interactive One LLC
    4 New York Plaza
    Suite 501
    New York, New York 10004
    Attn: Vice President of Legal and Business Affairs
     
  If to Clip: Michael Lawless-CEO
    3100 Carbon Place
    Boulder, CO 80301

 

or, alternatively, to such substitute addresses and persons as either party may designate to the other from time to time by written notice in accordance with this Section.

 

13. GENERAL

 

13.1             Subcontractors. Clip shall not deploy subcontractors to such an extent that such deployment would constitute an effective assignment of Clip’s obligations under this Agreement. Clip shall remain solely responsible for the performance of all of its obligations hereunder, notwithstanding Clip’s deployment of any subcontractor hereunder.

 

13.2             Relationship of the Parties. The relationship of Clip and its successors in interest, on the one hand, and XXXXX, and its successors in interest, on the other hand, is that of independent contractors, and not one of principal and agent, joint venture or partnership. Neither Clip, on the one hand, nor XXXXX, on the other hand, shall have any authority to create or assume, in the name or on behalf of the other party, any obligation, express or implied, nor to act or purport to act as the agent or the legally empowered representative of the other party for any purpose whatsoever.

 

13.3             Binding Effect. This Agreement shall be binding on and inure to the benefit of the parties and their respective permitted successors and assigns. XXXXX may assign its rights and delegate its duties under this Agreement (in whole or in part) without Clip’s consent: (a) to any Affiliate of XXXXX; or (b) in connection with a merger, consolidation, sale of substantially all of its assets, other business combination, spin-off or other restructuring. Clip may not assign any of its rights or delegate any of its duties under this Agreement (by operation of law or otherwise) without XXXXX’s prior written consent (not to be unreasonably withheld) except in connection with a merger, consolidation, sale of substantially all of its assets, other business combination, spin-off or other restructuring.

 

 

 

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13.4             Severability. If any provision of this Agreement is declared or found to be illegal, unenforceable, or void by a court of law, the parties shall negotiate in good faith to agree upon a substitute provision that is legal and enforceable and is as nearly as possible consistent with the intentions underlying the original provision. If the remainder of this Agreement is not materially affected by such declaration or finding and is capable of substantial performance, then the remainder shall be enforced to the extent permitted by Law.

 

13.5             Waivers. No delay or omission by either party to exercise any right or power will impair any such right or power or be construed to be a waiver thereof. A waiver by any party of any of the covenants, conditions, or contracts to be performed by the other or any breach thereof shall not be construed to be a waiver of any succeeding breach thereof or of any other covenant, condition, or contract herein contained. No change, waiver, or discharge hereof shall be valid unless in writing and signed by an authorized representative of the party against which such change, waiver, or discharge is sought to be enforced.

 

13.6             Remedies. Except as expressly provided otherwise in this Agreement, in addition to any remedies provided in this Agreement, the parties shall have all remedies provided at law or in equity. The rights and remedies provided in this Agreement or otherwise under Law shall be cumulative and the exercise of any particular right or remedy shall not preclude the exercise of any other rights or remedies in addition to, or as an alternative of, such right or remedy, except as expressly provided otherwise in this Agreement.

 

13.7             No Third-Party Beneficiaries. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any entity (other the parties’ respective Related Parties, permitted successors and assigns), any remedy or claim by reason of this Agreement, and any such remedies or claims shall be for the exclusive benefit of Clip and XXXXX.

 

13.8             Governing Law. The interpretation, validity and enforcement of this Agreement, shall be governed by the laws of the State of Delaware.

 

13.9             Force Majeure. Neither party is responsible for delays or failures in performance resulting from acts of God, strikes, lockouts, riots, acts of war and terrorism, embargoes, changes in governmental regulations, epidemics, fire, communication line failures, power failures, earthquakes or other disasters (each, an event of “Force Majeure”). If a claim by a party for release of its obligations under this Section 13.9 exceeds thirty (30) days, then the other party has the right to terminate this Agreement. Neither party is entitled to relief under this Section to the extent that any event otherwise constituting an event of Force Majeure results from the negligence of fault of the applicable party or its Related Parties.

 

13.10         Further Assurances. To the extent reasonable, the parties agree (a) to furnish upon request to any other party such further information, (b) to execute and deliver to any other party such other documents and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

 

13.11         Expenses. Except as otherwise expressly set forth herein, each of the parties shall pay its own costs and expenses associated with the execution and performance of this Agreement.

 

13.12         Survival. The rights and obligations of the parties set forth in Sections 4.0 , 6.0, 7.0, 8.0, 9.0, 10.2.5 and 13.0 and their respective Sections, and any other provision of this Agreement that by its nature is intended to survive, shall survive the expiration or termination of this Agreement for any reason whatsoever.

 

13.13         Ent ire Agreement: Amendment. This Agreement. including any Exhibits and documents referred to in th s Agreement or attached hereto and each Statement of Work executed by the parties, constitutes the entire and ex lusive statement of this Agreement with respect to its subject matter and supersedes any and all oral or written representations, understandings. or agreements relating thereto. This Agreement may be modified, supple ented or changed only by an agreement in writing which makes specific reference to this Agreement and which i signed by both Clip and XXXXX.

 

 

 

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13.14        Captions. The captions and headings contained herein are for purposes of convenience only and are not part of this Agreement.

 

13.15        Construction. This Agreement and the Exhibits hereto have been drafted jointly by the parties and in thee emofanyambiguities in the language hereof, there shall be no inference drawn in favor of or against either party.

 

13.16         Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be dee ed an original, but all of which shall constitute the same instrument.

 

IN WITNESS WHEREOF, Clip and XXXXX have executed this Agreement as of the Effective Date.

 

 

XXXXXXXX
Name: MICHAEL LAWLESS Name: /s/
   
Title:   CEO Title: Executive Vice President
   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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EXHIBIT A

 

STATEMENT OF WORK & BUSINESS TERMS

 

1. Clip Agrees To Provide The Following

 

· Clip agrees to maintain and regularly update all deployed mobile apps and web players for all stations and personalities.

 

· Provide an interactive cross platform solution for all simulcast content on broadcast, mobile, and web thereby enhancing all forms of listening and enabling new monetization opportunities.

 

· Enable the delivery of XXXXX and associated brand content to the station mobile apps and web players

 

· Materially increase spot and digital revenue value and enable new revenue channels for XXXXX stations.

 

· Increase valuation of XXXXX by driving increased revenue and profitability.

 

2. Clip Interactive Solution Elements
     
    Clip will continuously provide its interactive solution to enable engagement with all radio content – music, promotions, commercials and programming – for all XXXXX listeners, no matter where or how they listen to XXXXX stations. Elements of that solution include:

 

· Station Branded Mobile Applications – Provide branded station mobile apps that enable broadcast, streaming with interactivity & attribution to create strong local and national monetization capabilities.

 

· Reach Syndicated Program Branded Mobile Applications- Provide Reach Syndicated Program branded mobile applications for up to seven (7) Reach Media Personalities to create direct listening, engagement and revenue for each Reach Syndicated Programs.

 

· Station Branded Portal Capabilities – Provides access to any XXXXX station through the XXXXX branded station app or XXXXX branded national portal applications, attracting more than just P1 listeners to your mobile apps and dramatically growing your mobile user base.

 

· Station Branded Interactive Web/Desktop Player – Branded station web based listening platform that enables full interactive radio capabilities on desktop for XXXXX’s web based listening.

 

· Now Playing Website API – Provide access to the broadcast’s now playing information for integration into Station’s Home Web page. Information provided includes song name, artist name, album image.

 

· 3rd Party Integrations – Integration with all key 3rd party partners, including: Nielsen, DFP, ComScore, Apple CarPlay and Android Auto.

 

 

 

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3. Clip agrees to continue to provide:

 

· Reach Syndicated Program content included in station feeds.

· Radio One portal app capabilities, enabling users to access all Radio One stations via the station branded apps if so desired.

· Initial local CMS, programming, traffic and sales training as outlined in Section 8: Sales & Programming Training.

· On-going local sales & programming support as outlined in Section 8: Sales & Programming Training.

· Simple interactive content management system.

· Analytics console/dashboard as outlined in Section 6: Data & Analytics.

· Clip will provide updates to the Clip Apps in a manner consistent with the updates provided to other clients, provided however that Radio One shall receive no less than two (2) Clip App updates during each twelve (12) months during the Term at no additional cost.

 

4. Station & Reach Syndicated Program Branded Mobile Applications Overview
     
    Clip will continue to provide robust mobile apps for all XXXXX stations and Reach Media Syndicated Sites to allow for listening and interactivity of the broadcast and the stream via the mobile app or via a mobile web browser. Clip will have access to any existing account keys/access for the development process and ultimate release of the apps through these existing accounts.

 

5. Station & Reach Syndicated Program Branded Mobile App Features
     
    This platform provides a base set of features and functionality (itemized below).
     
   

Station Mobile App Features List

 

· Mobile stream player that is compatible with XXXXX’s existing streaming provider, Triton Digital

· Broadcast and streaming audio content identification and interactive feed

· Playlist history with artwork/artist info and lyrics

· 1-3 hour station content “Look Back”

· User’s personalized “Bookmarked” content list

· Artist Feeds - Artist’s info, photos, videos, music, social feeds, concert info, and link to official website. Clip will place links to artists content sites in the XXXXX App Artists Feeds allowing users to access the artist content will in the XXXXX Apps

· Expanded rich interactivity for all interactive content, subject to clearances of all third party rights.

 

 

 

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o Artist content engagement

o Social posts from Facebook, Twitter and Instagram

o Ability to enter station contests/promotions

o Ability to request email contact from advertisers

o Listener polls/surveys

o View video content
o Display web coupons & offers
o Display content in “Featured” position
o Talk back feature - recorded voice messaging to station and/or host
o RSS feed integration for station or 3rd party content video* or audio*
o RSS feed integration for news/traffic/weather/sports/calendar or podcasts
o Station & Reach Syndicated Program social integration (Twitter/Facebook/Instagram)
· Station podcast vault
· Current program listing/history show name/host name/time description – only able to link out to web based content hosted by station/group

· Alarm clock
· Apple CarPlay and Android Auto in dash user connectivity
· One-time user registration that conform to and address XXXXX’s current Privacy Policies and to the extent possible.
o Name
o Gender
o Age
o Email address
o Zip code
· Ability for registration pass through of mobile users
· Ability to require user registration for engagement with featured content, contesting, promotions and music downloads
· Ability to target consumption of offers by geo-location, subject to all applicable laws, rules and regulations and at all times in compliance with XXXXX’s privacy policies.
· Ability to target or block content based on age in accordance with applicable laws, rules and regulations
· Menu navigation button for station website, Reach Syndicated Program blogs, perks and song sharing
· Menu navigation button to call, email and text the stations
· Self-administrated Content Management System (CMS)

 

    *XXXXX is responsible for all costs associated with streaming music royalties or any 3rd party content fees resulting from content XXXXX elects to put into its applications.
     
    Additional features or capabilities may be added upon XXXXX’s request. Such requested features must be scoped to determine development costs and timelines, but Clip is open to adding additional features based on reasonable time frames and costs associated with any request.

 

 

 

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Reach Syndicated Program Mobile App Features

 

· Free consumer apps on iOS and Android
· Current and historic program listing show name/host name/time description
· Broadcast and streaming audio interactive feed reflective of all Reach Syndicated Program content
· Audio streaming on mobile
· Audio streaming from in-studio feed on web player
· User activated auto replay of Reach Syndicated Program show, if the live show has ended in specific a time zone
· In app podcast/on-demand library
· In app live in studio video feeds
· In app video content library
· “Reach Syndicated Program Talk Back Feature”- Recorded voice messaging to Reach Syndicated Program
· Alarm clock/auto wake for affiliate stations
· User personalized “Saved List” for all Reach Syndicated Program content
· 1-3 hour Reach Syndicated Program Scroll Back”
· Ability to enter all Reach Syndicated Program contests/promotions
· Ability to request email contact from advertisers
· Listener Polls/Surveys/Feedback
· Display web coupons and offers

· Display content in “Featured” position
· E-commerce connectivity “Reach Syndicated Program’s On Line Store” and/or 3rd Party sources like Amazon, and others (out of app)

· Simple user registration
o Name
o Gender
o Age
o Email address
o Username & password
o Ability for single registration pass through of mobile users
  o Ability to geo-lock targeting and restrict consumption of mobile offers/ads

· RSS feed integration of 3rd Party Video* or Audio* content in navigation menu
· RSS feed integration for traffic/weather/sports/calendar or podcasts* in navigation menu
· Menu buttons for each Reach Syndicated Program website, blogs, & social pages
· Menu buttons to call, email, text the Reach Syndicated Program Show
· Reach Syndicated Program Show’s social stream integration (Twitter/Facebook/Instagram)
· Self-administrated Content Management System with customized rules and permissions
· Ability to change navigation or make edits to in application without requiring an update to iOS or Android store.
  · One-time user registration that conform to and address Reach Media’s current Privacy Policies and Terms of Service.

 

 

 

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6. Station Branded Interactive Web/Desktop Player Overview
     
    Clip will continue to provide to XXXXX a web player that will enhance users' online listening experience; enabling listener interactions on the desktop and mobile browser. Clip will manage the live web player, which functions on all the major web browsers as well as iOS, Android and Windows devices
     
   

                Clip to Provide:

     

· Host branded station web players for all XXXXX radio stations.
· User experience on web/desktop will match interactivity and attribution on mobile apps.
· Web interactive content management system.
· Web analytics console/dashboard.
· Web programming and sales training.
· Web traffic and campaign management training.

 

    Web Player Features List Pop out or embedded player in station’s web player page for the XXXXX’s website platform
     

· Mobile web browser compatible with iOS, Android and Windows devices
· Web streaming audio content id and interactive feed
· Song/Artist info/bios
· Song lyrics, song purchase
· Artist Feeds - Artist’s info, photos, videos, music, social feeds, concert info, link to official website

· Events calendar
· User customizable real time content feeds for all music, personalities, promotions, contests, events and content on stream
· User’s personalized “Bookmarked” content list

· Expanded rich interactivity for all interactive content
o Artist content engagement
o Social posts - Facebook, Twitter Instagram
o Ability to enter station contests/promotions
o Ability to request email contact from advertisers
o Listener polls/surveys
o View video content
o Print web coupons & offers
o “Featured” position
o RSS feed integration for station or 3rd party content video* or audio**
o RSS feed integration for news/traffic/weather/sports/calendar or podcasts*XXXXX is responsible for all content royalty fees

 

 

 

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    Additional features or capabilities may be added upon XXXXX’s request. Such requested features must be scoped to determine development costs and timelines, but Clip is open to adding additional features based on reasonable time frames and costs associated with any request.
     
   

Now Playing API Content Feed for Website

     
    For XXXXX music stations, Clip will provide access to the broadcast’s now playing information for integration into Station’s Home Web page. Information provided includes song name, artist name, and album image. The JavaScript API provides live updates as the now playing information changes. Also, access to recent historical items is available.

 

7. Interactive Advertiser Capabilities
     
    Clip’s mobile applications provide a rich advertiser interface that allows XXXXX station’s listeners to electively respond and engage with advertiser messages in the broadcast and stream through the app. Clip’s interface allows the XXXXX stations to capture user engagements on advertisements during and after a broadcast or streamed advertiser spot runs, thus extending the life of the spot beyond when the: 30 or: 60 sec on-air message runs.
     
    All engagements with the advertisements are tracked and measured by Clip’s analytics dashboard, which can be passed back to advertisers to show results that XXXXX stations deliver for advertisers.
     
    The Hosted App Services will include Clip’s content management system and ad server that manages and serves the native Clip advertising content into the Clip Apps and Web Players. . The Clip ad server and content management system will be fully compatible with DoubleClick for Publishers (DFP) shall serve ad units via DFP trafficking system and shall be fully compatible with DFP’s ad serving, trafficking, creative, and targeting capabilities. Additionally, Clip agrees to repurpose or reconfigure any existing mobile ad units, such as the current 320x50, 300x250 and mobile interstitials into a native content positions in the new applications, to insure a positive user experience, as well as the continuation and growth of Radio One’s digital only ad revenue.
     
   

Below is a list of the various advertiser executions that can be associated with an advertiser’s broadcast and streamed radio spots.

     
   

Advertiser Executions

 

· Tap to receive advertiser email offer.
· Tap to visit advertiser mobile or website/page

· Tap to call the advertiser directly
· Tap to receive redeemable advertiser mobile coupon
· Scratch & win to receive prize, coupon or special offer
· Tap to take an advertiser poll or survey
· Tap to enter advertiser sponsorship contest or promotion
· Tap to submit user permission for contact by advertiser
· Tap to view advertiser elective video
· Tap to submit UGC photo or video content to advertiser for a prize or reward (mobile only)
· Tap to submit recorded voice message (mobile only)
· Tap to enter advertiser key word or promo code to receive offers or prize

 

 

 

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8. 3rd Party Ad Serving & Analytics Integration Clip agrees to work with industry recognized third party providers for all key 3rd party ad serving and analytic needs, approved partners include – Google Analytics, Nielsen, DFP, ComScore to provide seamless delivery of existing 3rd party ads and data.

 

9. Content Management System – CMS
     
   

Clip will continue to supply a robust Content Management System (CMS) for the creation, scheduling and management of all interactive radio campaigns.

     
    CMS Features:

 

· Permission based administration level access
o Station
o Market
o Cluster
o National
· Time based scheduling
· Audio recognition based scheduling
· Real-time campaign optimization
· Visual creative upload
· URL link upload
· Video link upload
· Contest/promotion entry set-up
· Polling/survey set-up
· Scratch off and secret word games set-up
· Geo-lock campaign set-up
· Social content set up - Facebook, Twitter, Instagram
· 3rd Party RSS feeds set up

 

10. Data & Analytics
     
    Clip will supply a proprietary, robust analytics solution for the measurement, tracking and analysis of interactive radio campaigns for the XXXXX radio platforms. Clip analytics will provide data and metrics on all aspects of user interaction and campaign activity for both advertising and programming. Our analytics solution will allow for station, market and national level permission based access to user and campaign data. Campaign and user data can be pulled by station, market, date, campaign, and creative execution. XXXXX will receive an analytics dashboard specific to their needs and requirements. This dashboard can and will be enhanced over time as XXXXX’s needs change and as their presence on the Clip platform expands. All personal identifiable and aggregated information collected from users and the data and analytics collected pursuant to this Agreement is XXXXX’s confidential information and no use shall be made of this data and analytics by Clip or its third party providers, except to the extent required to perform the services set forth in this Agreement to XXXXX and the Reach Media.

 

 

 

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    The following analytics capabilities and specific metrics are provided in the base analytics solution:

 

 

Analytics/Data Capabilities:

  Metrics (overall and unique)
       
  App installs - by app/station   Impressions
  App installs - by cluster   Opens/Views
  App installs - overall   Engagements
  Monthly active users   Video starts and completions
  Demographics by station   Social shares
  Registered users by station    
  Campaign results    
  Campaign results by date    
  Campaign poll results    
  Campaign spot audit    
  Campaign lead gens    
  Campaign activity by time of day    
  Top campaigns by station    
  Top campaigns by week    
  Song charts by station    
  Station daily activity    

 

11. Clip Platform Training and Support
     
    To minimize resource constraints from XXXXX, Clip will provide support, training, education, and sales campaign set-up and management. The goal of this support is for XXXXX stations and Reach Syndicated Program Applications to have successful programming and sales activation, driving user adoption growth and additional revenue.

 

· Transition Period. Clip agrees to provide a 90-day transition period whereby Clip will continue to provide campaign set-up support as Clip trains Radio One and Reach media staff on how to become “independent Operators”. Ongoing Programming and Promotions Training

 

o Program Directors, on-air talent, digital staff, and promotions teams will be trained on the capabilities of the app and how they can be interwoven into the fold of the station and messaged out to the audience. Training will also include a comprehensive overview of the CMS and analytics dashboard.

 

 

 

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· Ongoing Sales Training

 

o Sales managers and their staff will be trained on how to add interactive radio to any campaign,the value it can bring to advertisers and recommended packages to be sold. Clip will also help identify the ideal interactive radio advertisers that stand to benefit the most from the technology. Training will also include a comprehensive overview of the CMS and analytics dashboard. The goal of this support and training is to get station teams (sales, programming and promotions) to a place where they are comfortable creating interactive radio content, promoting it to their listeners, and selling interactive radio campaigns to their advertisers. While the above prescriptive training is provided, there will be opportunities for additional training as needed.

 

12. Press Announcement
     
    Upon execution of this Agreement, Clip and XXXXX may elect to create a mutually beneficial and mutually acceptable press release announcing our partnership. The goal is to establish XXXXX as an innovative leader in the future of the radio, and to promote XXXXX’s new interactive platform to the industry and advertisers.

 

13. XXXXX & Reach Media Hardware Costs, Services and Ad Fees
     
    Upfront Development & Hardware Fees
     
    Clip will develop individual station branded mobile apps for iOS and Android platforms, and branded interactive web players for all XXXXX stations and up to (7) seven national network Reach Syndicated Program Applications for iOS and Android.
     
    In order to monitor all XXXXX stations to make all of the broadcast and streamed content interactive, the Clip web and mobile platform requires station monitoring hardware installation connected to each local station’s studio automation systems.
     
    For the Reach Media Reach Syndicated Program apps there will be no requirement for additional monitoring hardware, as Clip will already be monitoring XXXXX stations, which broadcast the Reach Media personalities.
     
    Below are the costs per station that XXXXX will pay upfront prior to the start of development of any new mobile apps and web players:
     
    Station Apps & Web Players - One Time Development & Hardware Costs
     
    Per Station App & Web Player Development Costs: $500 (for new apps only)
    Per Station Content Monitoring Hardware Costs:      $0

 

* Monitoring hardware fees will only be applied if a new Barix installation is required to monitor a non-simulcast streamed station. If monitoring hardware is not required, then no hardware fees will be applied to that station.

 

 

 

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    Reach Syndicated Program Apps - One Time Development & Hardware Costs:
     
    Reach Syndicated Program App Development Costs: $1,000** Per App (new apps only)
     
    Monthly Platform Fees:
     
    The platform fee includes all mobile app and web players hosting, enhancements and services for all stations regardless of their activation of revenue. This flat monthly platform fee is separate from the proposed Interactive Spot Advertiser Campaign fees and other digital advertising transaction fees that are outlined later in the document.
     
    Per Station App & Web Player Monthly Service & Support Fee:

  · Per Station App/Web Player $250 per station app
       
  · Per Reach Syndicated Program Monthly Services & Support Fee: $250 per station app

 

Interactive Spot Advertiser Campaign Set Up & Serving Fees:

 

In order to achieve a scalable and sustainable business model for both XXXXX and Clip, the economic goals of the stations and personalities utilizing the Clip platform is to increase the value of broadcast and digital sales for advertisers by making both broadcast and streaming ad content richly interactive and attributable. As we have seen, across all our station affiliates and personalities using the Clip applications and web players, advertisers are willing to pay an average of 15% upcharge to make their broadcast and streaming campaign interactive.

 

Additionally, these interactive capabilities have helped to bring new advertisers to radio and sustain existing advertisers who are being lured away by digital media attributable results.

 

14. Clip-Sold National Digital Revenue

 

Subject to XXXXX’s prior written consent in each instance Clip will have the right to sell national interactive mobile and web player campaigns to agencies and direct clients that are non-competitive to XXXXX’s current agencies and advertiser relationships to run on XXXXX apps and web players. Clip agrees to contact XXXXX for approval of Clip sold national digital advertiser campaign to run in the XXXXX applications. Applications. XXXXX has no obligation to accept any Clip sold national digital advertiser campaign. XXXXX will have the right to supply a list of advertiser categories it deems as inappropriate and that it refuses run on their mobile apps and web players.

 

Upon the prior written approval by XXXXX of Clip sold national digital advertiser campaigns, Clip agrees to share this national digital revenue with XXXXX based on the percentage of impressions and engagements from each campaign that are coming directly from the XXXXX mobile applications and web players. Clip will pay a rev share of 33% of Clip-sold national digital campaigns with XXXXX. XXXXX’s rev share is generated from the impressions and engagements that occur on the XXXXX mobile applications and web players. Following the first 6-months of activation Clip and XXXXX will review revenue data and evaluate rev share.

 

Clip will provide a monthly report of all Clip-sold national campaigns that run on XXXXX mobile application and web players, detailing the impressions, engagements per campaign and gross and net revenues. Clip will pay XXXXX the determined revenue share within 30 days following delivery of each campaign. XXXXX will have the right to refuse any specific advertiser that is does not feel is appropriate to run or that are deemed competitive to XXXXX in any way.

 

 

 

 

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Exhibit B

 

PER STATION/SYNDICATED SITE SERVICE LEVEL AGREEMENT

 

1. AVAILABILITY SLA.

 

1.1. Performance and Availability. The Hosted App Service shall be available to each radio station and syndication site twenty-four (24) hours a day, seven (7) days per week, ninety-nine point nine percent (99.9%) of the time, calculated on a monthly basis (“Monthly Uptime Standard”).

 

1.2. Service Level Credits. In the event Clip fails to meet the Monthly Uptime Standard for any month, then upon written request from XXXXX, Clip agrees to provide the following rebates on XXXXX’s next monthly invoice (each a “Service Level Credit”) in the amount below that relates to the aggregate length of the downtime occurrence Additional downtime occurring in the same month will receive cumulative rebate credits on the next monthly invoice. The “Pro-rata Fee” shall be calculated as follows: (total amount paid to Clip for any impacted campaigns divided by (number of days in campaign).

 

1.2.1. In the event that Clip fails to meet uptime standards as a result of a third party, then service level credits will not be granted.

 

1.2.2.Clip will provide XXXXX with a downtime report on a monthly basis on a per station/syndicated site basis.

 

Monthly Uptime Standard Credit
Unavailable 0 - 43 minutes No credit
Unavailable 44 - 60 minutes 5% of Pro-rata Fee
Unavailable 60 - 120 minutes 10% of Pro-rata Fee
Unavailable 120 - 240 minutes 15% of Pro-rata Fee
Unavailable 240 - 300 minutes 25% of Pro-rata Fee
Unavailable > 300 minutes 50% of Pro-rata Fee

 

1.3. Exceptions. XXXXX shall not receive Service Level Credits to the extent such are caused by any of the following reasons.

 

1.3.1. Any latency or downtime due to XXXXX’s acts or omissions or any XXXXX communications or power outage;

 

1.3.2. Scheduled maintenance; or

 

1.3.3. Any Force Majeure Event, as defined in the Agreement.

 

1.4. Scheduled Maintenance. Scheduled Maintenance shall:

 

1.4.1. Not be performed unless scheduled at least forty-eight (48) hours in advance of written notice;

 

1.4.2. Be performed between the following hours: weekdays: 10PM MDT and 4AM MDT, weekends: anytime.

 

2. TERMINATION RIGHTS. XXXXX may terminate this Agreement in the event that Clip fails to meet its performance and availability criteria at any three (3) times during the Term.

 

 

 

  24  

 

 

Exhibit C

 

Customer Support

 

 

 

 

Ongoing Customer Support:

 

Clip will provide a dedicated support team providing services to XXXXX. That team will be responsible for station trainings (programming and sales), sales support (campaign management training) and handling all end-user support issues.

 

Help Desk Support for External Users;

 

Clip will host and manage external user help desk via telephone and email;

All Help Desk tickets from XXXXX applications will receive a response within 6-hours of receipt.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  25  

 

Exhibit 23.1

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in this Registration Statement on Form S-1 of our report dated October 2, 2019, with respect to the financial statements of Clip Interactive, LLC as of and for the years ended December 31, 2018 and 2017.  We also consent to the reference to us under the heading “Experts” in such Registration Statement.

 

/s/ Plante & Moran, PLLC

 

January 27, 2020

Denver, Colorado

 

Exhibit 99.1

 

Consent of Person Named as About to Become Director

January 2, 2020

 

Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I hereby consent to my being named in the Registration Statement on Form S-1 of Clip Interactive, LLC, and all amendments thereto (the Registration Statement) and any related prospectus filed pursuant to Rule 424 promulgated under the Securities Act of 1933, as a person anticipated to become a director of Auddia Inc. upon the incorporation of Auddia Inc. and to the filing of this consent as an exhibit to the Registration Statement.

 

 

Sincerely,

 

/s/ Steve Deitsch                                          

Name: Steve Deitsch

Exhibit 99.2

 

Consent of Person Named as About to Become Director

January 2, 2020

 

Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I hereby consent to my being named in the Registration Statement on Form S-1 of Clip Interactive, LLC, and all amendments thereto (the Registration Statement) and any related prospectus filed pursuant to Rule 424 promulgated under the Securities Act of 1933, as a person anticipated to become a director of Auddia Inc. upon the incorporation of Auddia Inc. and to the filing of this consent as an exhibit to the Registration Statement.

 

 

Sincerely,

 

/s/ Jim Booth                                          

Name: Jim Booth

Exhibit 99.3

 

Consent of Person Named as About to Become Director

January 2, 2020

 

Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I hereby consent to my being named in the Registration Statement on Form S-1 of Clip Interactive, LLC, and all amendments thereto (the Registration Statement) and any related prospectus filed pursuant to Rule 424 promulgated under the Securities Act of 1933, as a person anticipated to become a director of Auddia Inc. upon the incorporation of Auddia Inc. and to the filing of this consent as an exhibit to the Registration Statement.

 

 

Sincerely,

 

/s/ Michael Lawless                                          

Name: Michael Lawless