AUDDIA INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial statements (prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP") and related notes included elsewhere in this Annual Report on Form 10-K (this "Form 10-K"). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly in the section entitled "Risk Factors." Unless we state otherwise or the context otherwise requires, the terms "we," "us," "our" and the "Company" referAuddia Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted. OverviewAuddia is a technology company headquartered inBoulder, CO that is reinventing how consumers engage with audio through the development of a proprietary AI platform for audio and innovative technologies for podcasts.Auddia is leveraging these technologies within its industry-first audio Superapp, faidr (previously known as the Auddia App). faidr gives consumers the opportunity to listen to any AM/FM radio station with no commercials while personalizing the listening experience through skips and the insertion of on-demand content, including popular and new music, news, and weather. The faidr app represents the first-time consumers can combine the local content uniquely provided by AM/FM radio with commercial-free and personalized listening many consumers demand from digital-media consumption. In addition to commercial-free AM/FM, faidr includes podcasts and exclusive content, branded faidrRadio, which includes new artist discovery, curated music stations, and Music Casts. Music Casts are unique to faidr. Hosts and DJs can combine on-demand talk segments with dynamic music streaming, which allows users to hear podcasts with full music track plays embedded in the episodes.Auddia has also developed a podcasting platform that provides a unique suite of tools that helps Podcasters create additional digital content for their podcast episodes as well as plan their episodes, build their brand, and monetize their content with new content distribution channels. This podcast platform also gives users the ability to go deeper into the stories through supplemental, digital content, and eventually comment and contribute their own content to episode feeds.
Both of
The Company has developed its AI platform on top of Google's TensorFlow open-source library that is being "taught" to know the difference between all types of audio content on the radio. For instance, the platform recognizes the difference between a commercial and a song and is learning the differences between all other content to include weather reports, traffic, news, sports, DJ conversation, etc. Not only does the technology learn the differences between the various types of audio segments, but it also identifies the beginning and end of each piece of content. The Company is leveraging this technology platform within its premium AM/FM radio listening experience through the faidr App. The faidr App is intended to be downloaded by consumers who will pay a subscription fee in order to listen to any streaming AM/FM radio station without commercials, podcasts and the faidrRadio exclusive content offerings. Advanced features will allow consumers to skip any content heard on the station, request audio content on-demand, and program an audio routine. We believe the faidr App represents a significant differentiated audio streaming product, or Superapp, that will be the first to come to market since the emergence of popular streaming music apps such as Pandora, Spotify, Apple Music, Amazon Music, etc. We believe that the most significant point of differentiation is that in addition to ad-free AM/FM streaming, the faidr App is intended to deliver non-music content that includes local sports, news, weather, traffic and the discovery of new music alongside exclusive programming and podcasts. No other radio streaming app available today, including category leaders likeTuneIn , iHeart, and Audacy, can compete with faidr's full product offerings. We launched an MVP version of faidr through several consumer trials in 2021 to measure consumer interest and engagement with the App. The full app launched onFebruary 15, 2022 , and included all majorU.S. radio stations in the US. InFebruary 2023 , we added faidrRadio, our exclusive content offerings, to the app. Podcasts will be added before the end of Q1, 2023. 30
The Company has also developed its podcasting platform, which leverages technologies and proven product concepts to differentiate its podcasts offering from other competitors in the radio streaming product category.
With podcasting growing and predicted to grow at a rapid rate, theAuddia podcast platform was conceptualized to fill a void in the emerging audio media space. The platform aims to be the preferred podcasting solution for podcasters by enabling them to deliver digital content feeds that match the audio of their podcast episodes, and by enabling podcasters to make additional revenue from new digital advertising channels; subscription channels; on-demand fees for exclusive content; and through direct donations from their listeners. Today, podcasters do not have a preference as to where their listeners access their episodes, as virtually all listening options (mobile apps and web players) deliver only their podcast audio. By creating a platform on which they can make net new and higher margin revenue, we believe that podcasters will promote faidr to their listeners, thus creating a powerful, organic marketing dynamic. One innovative and proprietary part of the podcast platform is the availability of tools to create and distribute an interactive digital feed which supplements podcast episode audio with additional digital. These content feeds allow podcasters to tell deeper stories to their listeners while giving podcasters access to digital revenue for the first time. Podcasters will be able to build these interactive feeds using The Podcast Hub, a content management system that also serves as a tool to plan and manage podcast episodes. The digital feed activates a new digital ad channel that turns every audio ad into a direct-response, relevant-to-the-story, digital ad, increasing the effectiveness and value of their established audio ad model. The feed also presents a richer listening experience, as any element of a podcast episode can be supplemented with images, videos, text and web links. This feed will appear fully synchronized in the faidr mobile App, and it also can be hosted and accessed independently (e.g., through any browser), making the content feed universally distributable. Over time, users will be able to comment, and podcasters will be able to grant some users publishing rights to add content directly into the feed on their behalf. This will create another first for podcasting, a dialog between creator and fan, synchronized to the episode content. The podcast capabilities within faidr will also introduce a unique and industry first multi-channel, highly flexible set of revenue channels that podcasters can activate in combination to allow listeners to choose how they want to consume and pay for content. "Flex Revenue" allows podcasters to continue to run their standard audio ad model and complement those ads with direct response enabled digital ads in each episode content feed, increasing the value of advertising on any podcast. "Flex Revenue" will also activate subscriptions, on-demand fees for content (e.g., listen without audio ads for a micro payment fee) and direct donations from listeners. Using these channels in combination, podcasters can maximize revenue generation and exercise higher margin monetization models, beyond basic audio advertising. These revenue channels are expected to be available to Podcasters in 2022.
The faidr mobile App is available today through the iOS and Android App stores.
We have funded our operations with proceeds from theFebruary 2021 IPO and Series A warrants exercise inJuly 2021 . Since inception we have incurred significant operating losses. As ofDecember 31, 2022 , we had an accumulated deficit of$71.7 million . Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and commercialization of one or more of our Apps. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:
· nationally launch our faidr App and as we continue training our proprietary
AI technology and make product enhancements;
· continue to develop and expand our technology and functionality to advance
the faidr app;
· rollout our product on a national basis, which will include increasing our
sales and marketing costs related to the promotion of our products. faidr
promotion will include a combination of a) purchasing ads directly from
broadcasters or b) participating broadcasters to promote without purchasing
ads, but sharing a portion of subscription proceeds based on listening
activity on those stations;
· hire additional business development, product management, operational and
marketing personnel;
· continue market studies of our products; and
· add operational and general administrative personnel which will support our
product development programs, commercialization efforts and our transition
to operating as a public company.
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As a result, we will need substantial additional funding to support our
continuing operations and pursue our growth strategy. Until such time as we can
generate significant revenue from product sales, if ever, we expect to finance
our operations through the sale of equity, debt financings or other capital
sources, which may include collaborations with other companies or other
strategic transactions. We may be unable to raise additional funds or enter into
such other agreements or arrangements when needed on favorable terms, or at all.
If we fail to raise capital or enter into such agreements as and when needed, we
may have to significantly delay, scale back or discontinue the development and
commercialization of one or more of our product candidates.
Because of the numerous risks and uncertainties associated with product
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve or maintain profitability. Even if we
are able to generate product sales, we may not become profitable. If we fail to
become profitable or are unable to sustain profitability on a continuing basis,
then we may be unable to continue our operations at planned levels and be forced
to reduce or terminate our operations.
As of December 31, 2022 , we had cash of $1.66 million , which will only be
sufficient to fund our current operating plans into the second quarter of 2023.
The Company has based these estimates, however, on assumptions that may prove to
be wrong. We will need additional funding to complete the development of our
full product line and scale products with a demonstrated market fit. Management
has plans to secure such additional funding. If we are unable to raise capital
when needed or on acceptable terms, we would be forced to delay, reduce, or
eliminate our technology development and commercialization efforts.
Components of our results of operations
Operating expenses Direct costs of services
Direct cost of services consists primarily of costs incurred related to our technology and development of our Apps, including hosting and other technology related expenses. We will continue to incur such costs as we develop and enhance our technology related to faidr and the Vodacast platform. Sales and marketing Our sales and marketing expenses consist primarily of salaries and consulting services, related to the sales, promotion and commercial trials performed during the year related to our products. We expected our sales and marketing expenses to increase substantially as we promoted the national commercial launch of our faidr product onFebruary 15, 2022 , and look to generate revenue for our products through customer acquisition and retention. Research and development
Since our inception, we have focused significant resources on our research and development activities related to the software development of our technology. We account for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose is probable. We cease capitalization of development costs once the software has been substantially completed and is available for its intended use. Software development costs are amortized over a useful life estimated by the Company's management of three years. Costs associated with significant upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies. Unamortized capitalized software development costs determined to be in excess of anticipated future net revenues are impaired and expensed during the period of such determination. 32 General and administrative Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and professional fees related to auditing, tax, general legal services, and consulting services. We expect our general and administrative expenses to continue to increase in the future as we right-size our operating activities and prepare for commercialization of our products and support our operations as a public company, including increased expenses related to legal, accounting, insurance, regulatory and tax-related services associated with maintaining compliance with exchange listing andSecurities and Exchange Commission requirements, directors and officers liability insurance premiums and investor relations activities. Other income and expense
Our other income and expense during 2021 consist of interest income related to our cash at financial institutions, debt extinguishment related to our PPP loans, interest expense from our line of credit, and a finance charge related to conversion of outstanding debt into shares of common stock related to theFebruary 2021 IPO. OnNovember 14, 2022 , the Company entered into a secured bridge note ("Note") financing with one accredited investor, who is a significant existing shareholder of the Company, for$2.2 million . The interest expense for 2022 is primarily attributed to the debt and conversion features of such Note. Results of operations
Comparison of the Years ended
The following table summarizes our results of operations:
Year Ended December 31, Increase/
2022 2021 (Decrease)
Revenue $ - $ - $ -
Operating expenses
Direct cost of service 180,690 190,187 (9,497 )
Sales and marketing 1,673,692 740,652 933,040
Research and development 654,879 399,521 255,358General and administrative 3,223,520 4,072,419 (848,899 ) Depreciation and amortization 991,639
166,656 824,983
Total operating expense 6,724,420 5,569,435 1,154,985
Loss from operations (6,724,420 ) (5,569,435 ) (1,154,985 )
Other income (expense), net (173,026 ) (7,908,634 ) 7,735,608
Net loss $ (6,897,446 ) $ (13,478,069 ) $ 6,580,623
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Revenue
Total revenues for the twelve months ended
Direct Cost of Services Direct Cost of Services decreased by$9,497 or 5%, from$190,187 for the year endedDecember 31, 2021 , to$180,690 for the year endedDecember 31, 2022 . This decrease was primarily the result of a reduction in platform hosting costs which were partially offset by an increase in other music services. We continue to incur direct cost of services expense related to hosting and other music services related to faidr and Vodacast and expect these costs to increase in the future. Sales and marketing Sales and marketing expenses increased by$933,040 or 126%, from$740,652 for the year endedDecember 31, 2021 , to$1,673,692 for the year endedDecember 31, 2022 , primarily attributed to the increased marketing and promotion costs associated with faidr and Vodacast. Research and development Research and development expenses increased by$255,358 or 64%, from$399,521 for the year endedDecember 31, 2021 , to$654,879 for the year endedDecember 31, 2022 , primarily related to additional staffing on our development team as we continue to advance the faidr Superapp. Our research and development staffing costs were$2,408,737 and our software amortization expenses were$956,144 for the year endedDecember 31, 2022 , as compared to staffing costs of$1,835,451 and software amortization expenses of$146,737 for the year ended December
31, 2021. General and administrative General and administrative expenses decreased by$848,899 or 21%, from$4,072,419 for the year endedDecember 31, 2021 , compared to$3,223,520 for the year endedDecember 31, 2022 . The decrease resulted primarily from reduced stock compensation expense related to cancelled employee stock option grants. Stock compensation expense was$951,106 and$1,237,480 for the year endedDecember 31, 2022 , and 2021, respectively. We also saw a reduction of approximately$522,000 in public company expenses related to legal and other professional fees associated with the IPO in 2021. Other expense, net
Total other expense decreased by$7,735,608 or 98%, from$7,908,634 for the year endedDecember 31, 2021 , to$173,026 for the year endedDecember 31, 2022 . The decrease was due almost entirely to a finance charge of$8,141,424 to interest expense related to the conversion of outstanding debt into 6.8 million shares of common stock related to theFebruary 2021 IPO. This was offset by our extinguishment of debt related to our PPP loans in 2021 in the amount of$536,144 , which was approved in full under the loan forgiveness program. Income taxes Since our inception in 2012, until the corporate conversion inFebruary 2021 , we were organized as aColorado limited liability company for federal and state income tax purposes and treated as a partnership forU.S. income tax purposes. As such, we were not viewed as a taxpaying entity in any jurisdiction and do not require a provision for income taxes. Each member of our company was responsible for the tax liability, if any, related to its proportionate share of our taxable income. 34
Effective onFebruary 16, 2021 , we became treated as a corporation forU.S. income tax purposes and thus became subject toU.S. federal, state and local income taxes and are be taxed at the prevailing corporate tax rates. Among other things, we may begin to generate net operating losses at the corporate level. We will account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements but have not been reflected in taxable income. A valuation allowance is established to reduce deferred tax assets to its estimated realizable value, which is zero based on our operating history. Going Concern Our existing cash of$1.66 million atDecember 31, 2022 will only be sufficient to fund our current operating plans into the second quarter of 2023. The Company has based these estimates, however, on assumptions that may prove to be wrong. We will need additional funding to complete the development of our full product line and scale products with a demonstrated market fit. Management has plans to secure such additional funding. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce, or eliminate our technology development and commercialization efforts. As a result of the Company's recurring losses from operations, and the need for additional financing to fund its operating and capital requirements, there is uncertainty regarding the Company's ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company's ability to continue as a going concern.
Liquidity and capital resources
Sources of liquidity We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop and commercialize our faidr app and Vodacast platform. As ofDecember 31, 2022 , and 2021 we had cash of$1,661,434 and$6,345,291 , respectively. We have a deficiency in working capital in the amount of approximately$600,000 atDecember 31, 2022 . We anticipate that operating losses and net cash used in operating activities will continue over the next 12 months as we continue to develop and market our products.
OnNovember 14, 2022 , the Company entered into a secured bridge note ("Note") financing with one accredited investor who is a significant existing stockholder of the Company. The Company received$2.0 million of net proceeds in connection with the Note. The principal amount of the Note is$2.2 million . The Note has a 10% interest rate and matures onMay 31, 2023 . The Note is secured by a lien on substantially all of the Company's assets. At maturity, the investor has the option to convert any original issue discount and accrued but unpaid interest into shares of the Company's Common stock at a fixed conversion price of$1.23 per share. In connection with the Note financing, the Company issued to the investor 300,000 common stock warrants with a five-year term and a fixed$2.10 per share exercise price. The Company has the option to extend the maturity date by six months toNovember 30, 2023 . In the event of an extension, the interest rate on the Note will increase to 20% and the Company will issue to the investor an additional 300,000 warrants. The investor will not be able to receive shares upon conversion or exercise, unless prior stockholder approval is obtained, if the number of shares to be issued to the investor, when aggregated with all other shares of common stock then owned by the investor beneficially or deemed beneficially owned by the investor, would (i) result in the investor owning more than the Beneficial Ownership Limitation (as defined below), as determined in accordance with Section 13 of the Securities Exchange Act of 1934 or (ii) otherwise constitute a Change of Control within the meaning of Nasdaq Rule 5635(b). The "Beneficial Ownership Limitation" shall be 19.99% of the number of shares of the common stock outstanding immediately prior to the proposed issuance of shares of common stock.
The foregoing description of the Note and related security agreement and warrants is qualified in its entirety by reference to the full text of those agreements.
35
Equity Line Common Stock Purchase Agreement
OnNovember 14, 2022 , the Company entered into a Common Stock Purchase Agreement (the "White Lion Purchase Agreement") withWhite Lion Capital, LLC , aNevada limited liability company ("White Lion"). Pursuant to the WhiteLion Purchase Agreement, the Company has the right, but not the obligation to require White Lion to purchase, from time to time, the lesser of (a)$10,000,000 and (b) the amount eligible under Form S-3 (the "Commitment Amount") in aggregate gross purchase price of newly issued shares of the Company's common stock. Subject to the satisfaction of certain customary conditions, the Company's right to sell shares to White Lion will extend until the earlier of (a)December 31, 2023 ; and (b) the date that all shares are sold under the WhiteLion Purchase Agreement (the "Commitment Period"). During such term, subject to the terms and conditions of the White Lion Purchase Agreement, the Company may notify White Lion when the Company exercises its right to sell shares (the effective date of such notice, a "Notice Date"), and shall delivery the applicable shares of common stock to White Lion along with the purchase notice. The number of shares sold pursuant to any such notice may not exceed the lesser of: (i) 30% of the average of the daily trading volume of the Company's common stock over the five business days immediately preceding the date of delivery of a purchase notice; or (ii)$500,000 , divided by the highest closing price of the Common Stock over the most recent five business days immediately preceding receipt of a purchase notice; and the maximum dollar amount of any purchase notice cannot exceed$500,000 , subject to White Lion's wavier of such limitations. The closing date of each sale of shares of common stock under the White Lion Purchase Agreement occurs one business day after the end of the Valuation Period (defined below). The purchase price to be paid by white Lion for any such shares will equal 97% of the lowest daily volume-weighted average price of common stock during a period of three consecutive trading days commencing on, and following, the applicable Notice Date (the "Valuation Period"). No purchase notice shall result in White Lion beneficially owning (as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3 thereunder) more than 4.9% of the number of shares of the common stock outstanding immediately prior to the issuance of shares of common stock issuable pursuant to a purchase notice.
The Company may terminate the White Lion Purchase Agreement at any time in the event of a material breach of the Agreement by White Lion. In addition, the White Lion Purchase Agreement automatically terminates on the earlier of (i) the end of the Commitment Period or (ii) the date that, pursuant to or within the meaning of any bankruptcy law, the Company commences a voluntary case or any person commences a proceeding against the Company.
In consideration for the commitments of White Lion, as described above, the Company issued to White Lion, 140,186 shares of common stock (the "Commitment Shares").
Any proceeds that the Company receives under the White Lion Purchase Agreement are expected to be used for working capital and general corporate purposes.
The aggregate number of shares of common stock that the Company can sell to White Lion under the White Lion Purchase Agreement (including the Commitment Shares) may in no case exceed 2,501,700 shares of the common stock (which is equal to approximately 19.99% of the shares of the common stock outstanding immediately prior to the execution of the White Lion Purchase Agreement) (the "Exchange Cap"), unless stockholder approval is obtained to issue purchase shares above the Exchange Cap, in which case the Exchange Cap will no longer apply. Cash Flow Analysis Our cash flows from operating activities have historically been significantly impacted by revenues received, our investment in sales and marketing to drive growth, and research and development expenses. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives. 36 The following table summarizes the statements of cash flows for the years endedDecember 31, 2022 , and 2021: Year Ended December 31, 2022 2021 % Change Net cash provided by (used in): Operating activities$ (4,752,750 ) $ (5,471,545 ) $ 718,795 Investing activities (1,931,107 ) (1,552,686 ) (378,421 ) Financing activities 2,000,000 13,251,608 (11,251,608 ) Change in cash, cash equivalents, restricted cash and restricted cash equivalents$ (4,683,857 ) $ 6,227,377 $ (10,911,234 ) Operating Activities
Cash used in operating activities for the year ended
Cash used in operating activities for the year endedDecember 31, 2021 , of$5,471,545 was primarily the result of our net loss of$13,478,069 , and a change in working capital of$1,002,893 related to paying down our accounts payable balance from the prior year. These uses were partially offset by non-cash charges totaling$9,009,417 .
Cash used in operating activities for both years primarily consisted of personnel-related expenditures, marketing and promotion costs, and public company administrative support costs such as legal and other professional support services.
Investing Activities
Cash flows used in investing activities for the year ended
Financing Activities
Cash flows provided by financing activities for the year ended
Cash flows provided by financing activities for the year endedDecember 31, 2021 , increased by$13,251,608 from the prior year, primarily related to$20,041,811 from the issuance of common shares related to ourFebruary 2021 IPO. This was partially offset by a$6,000,000 repayment on our line of credit, and repayment of deferred salary and related party notes payable of$960,849 . Funding Requirements We historically have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of$71,735,834 and$64,838,389 as ofDecember 31, 2022 , and 2021, respectively. As ofDecember 31, 2022 , and 2021, we had cash of$1,661,434 and$6,345,291 , respectively. Our existing cash of$1.66 million atDecember 31, 2022 , will only be sufficient to fund our current operating plans into the second quarter of 2023. The Company has based these estimates, however, on assumptions that may prove to be wrong.We will need additional funding to complete the development of our full product line and scale products with a demonstrated market fit. Management has plans to secure such additional funding. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce, or eliminate our technology development and commercialization efforts 37 We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the development, and marketing and promotion of faidr. In addition, we expect to continue to incur additional costs associated with operating as a public company, including legal, accounting, investor relations and other expenses. Our future funding requirements will depend on many factors, including, but not limited to:
· the scope, progress, results, and costs related to the market acceptance
of our products
· the ability to attract podcasters and content creators to faidr and retain
listeners on the platform
· the costs, timing, and ability to continue to develop our technology
· effectively addressing any competing technological and market developments
· avoiding and defending against intellectual property infringement,
misappropriation, and other claims
Contractual Obligations
The following table summarizes our contractual obligations not on our Balance
Sheet as of
Payments due by period
Less Than 1 - 3 4 - 5 More Than
Total 1 Year Years Years 5 YearsOperating lease commitments (1)$ 46,202 $ 46,202 $ -
$ - $ -
(1) Represents minimum payments due for the lease of office space without
consideration of renewal options
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
theSEC .
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position, are described below. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. Software Development Costs The Company accounts for costs incurred in the development of computer software as software research and development costs until the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose is probable. The Company ceases capitalization of development costs once the software has been substantially completed and is available for its intended use. Software development costs are amortized over a useful life estimated by the Company's management of three years. Costs associated with significant upgrades and enhancements that result in additional functionality are capitalized. Capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in software technologies. Unamortized capitalized software development costs determined to be in excess of anticipated future net revenues are impaired and expensed during the period of such determination. Software development costs of$1,927,298 and$1,472,290 were capitalized in 2022 and 2021, respectively. Amortization of expense of capitalized software development costs were$956,144 and$146,737 for the years endedDecember 31, 2022 , and 2021, respectively and are included in depreciation and amortization expense. 38 Equity-based compensation Certain of our employees and consultants have received grants of common shares in our company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified. The common shares receive distributions if any in an order of priority in accordance with our limited liability company agreement. The fair value of each award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from theSt. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation. Prior to our IPO inFebruary 2021 , we were a private company with no active public market for our common equity. Therefore, we have periodically determined the overall value of our company and the estimated per share fair value of our common equity at their various dates using contemporaneous valuations performed with the assistance of a third-party specialist and in accordance with the guidance outlined in theAmerican Institute of CPA's Practice Aid.
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