WaveDancer, Inc. | Form 10-Q June 30, 2023 |
The Company earnsrecognized a gain on the sale of GMI of $100,615, which is included in net loss on discontinued operations in the unaudited condensed consolidated statement of operations, and immediately deconsolidated GMI upon its sale. GMDC was not a related party of the Company at the time of its purchase of GMI. Subsequent to our deconsolidation of GMI, GMI and GMDC are related parties of the Company due to our equity interest in GMDC.
The following table sets forth details of net earnings from discontinued operations for the six months ended June 30, 2023 and 2022, which reflects the results of the Blockchain SCM operating segment (See Note 1).
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Revenue | | $ | - | | | $ | 566,862 | | | $ | - | | | $ | 566,862 | |
Cost of revenue | | | - | | | | 540,921 | | | | 74,223 | | | | 861,327 | |
Gross Profit | | | | | | | 25,941 | | | | (74,223 | ) | | | (294,465 | ) |
Operating expenses - | | | | | | | | | | | | | | | | |
Salaries and benefits | | | - | | | | 378,431 | | | | 484,249 | | | | 613,278 | |
Intangibles amortization | | | - | | | | 306,917 | | | | 85,338 | | | | 613,705 | |
Stock based compensation, before forfeitures | | | - | | | | 170,629 | | | | 65,487 | | | | 252,839 | |
Forfeiture of stock options | | | - | | | | - | | | | (407,322 | ) | | | - | |
Other operating expenses | | | - | | | | 237,460 | | | | 134,633 | | | | 389,126 | |
Change in fair value of contingent consideration | | | - | | | | (942,609 | ) | | | - | | | | (930,000 | ) |
Gain on disposal of business | | | - | | | | - | | | | (100,615 | ) | | | - | |
Loss before income tax benefit | | | - | | | | (124,887 | ) | | | (335,993 | ) | | | (1,233,413 | ) |
Income tax benefit | | | - | | | | 521,338 | | | | - | | | | 1,710,917 | |
Net income (loss) on discontinued operations | | $ | - | | | $ | 396,451 | | | $ | (335,993 | ) | | $ | 477,504 | |
During the six months ended June 30, 2023, there was a total of 715,000 unvested stock options forfeited by GMI employees, including 527,500 forfeited by employees who resigned from WaveDancer, on the Sale Date, and were offered employment by GMDC. Stock-based compensation expense of $407,322, previously recognized for these forfeited options, was taken back into income in March 2023.
The following table presents the components of the assets of our discontinued operations that were classified as held for sale as of December 31, 2022. As of March 31, 2023, GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet.
| | | December 31,
2022 | |
Customer relationship intangible asset, net of amortization | | $ | 1,057,722 | |
Technology intangible asset, net of amortization | | | 760,698 | |
Capitalized software development costs | | | 498,425 | |
Total assets of discontinued operations | | $ | 2,316,845 | |
Note 3.Revenue from Contracts with Customers
Nature of Products and Services
We generate revenue from boththe sales of information technology professional services, and sales of third-party software licenses and related support. Theimplementation and training services, sales of third-party support and maintenance contracts based on those software products, and incentive payments received from third-party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. We sell through our direct relationships with end customers and under subcontractor arrangements.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units has occurred, and units are accepted by the customer or are reasonably expected to be accepted. Generally, revenue under fixed-price arrangements and mixed arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer. For fixed-price arrangements under which documentary evidence of acceptance or receipt of deliverables is not present or withheld by the customer, the Company recognizes revenue when a contractit has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability ofright to invoice the contract price is considered probable and can be reasonably estimated. Revenue from professional services is earned under time and materials and fixed-price contracts. For sales of third-party software products, revenue is recognized upon product delivery, with any maintenance related revenues recognized ratably over the maintenance period.
Revenue on time and materials contracts is recognized based on direct labor hours expended at contract billing rates and adding other billable direct costs.
customer. For fixed-price contracts that are based on unit pricing, the Company recognizes revenuearrangements for the number of units delivered in any given reporting period.
For fixed-price contracts in which the Company is paid a
specific amountfixed fee to
bemake itself available to
providesupport a
particular service for a stated period of time,customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over
time.Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the service period.type of customer and whether the licenses are bulk licenses or individual licenses. The Company applies this methodCompany’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of revenue recognitionthe full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to renewalsimplementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of maintenance contractsthe administrative portal. Revenue for bulk desktop software licenses for non-government customers is usually recognized on third-partya gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. For desktop software sales andlicenses sold on an individual license basis to separable maintenance elements of sales of third-party software that include fixed terms of maintenance, such as Adobe and Micro Focus software, for whichnon-government customers, where the Company is responsible for “first line support”has no obligation to the customer after the third-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for servingthe net of the selling price and its contract costs.
Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.
Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a liaisoncustomer, but the sale occurs directly between the customer and the third-party maintenance provider for issuessupplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.
Disaggregation of Revenue from Contracts with Customers
| | | Three months ended June 30, | |
| | | 2023 | | | 2022 | |
Contract Type | | Amount | | | Percentage | | | Amount | | | Percentage | |
Services time & materials | | $ | 1,719,674 | | | | 84.9 | % | | $ | 2,153,537 | | | | 57.4 | % |
Services fixed price over time | | | 102,402 | | | | 5.1 | % | | | 51,154 | | | | 1.3 | % |
Services combination | | | 33,090 | | | | 1.6 | % | | | 21,080 | | | | 0.6 | % |
Services fixed price per unit | | | 112,791 | | | | 5.6 | % | | | 52,061 | | | | 1.4 | % |
Third-party software | | | 56,665 | | | | 2.8 | % | | | 1,423,770 | | | | 38.0 | % |
Software support & maintenance | | | - | | | | - | % | | | 48,918 | | | | 1.3 | % |
Total revenue | | $ | 2,024,622 | | | | 100.0 | % | | $ | 3,750,520 | | | | 100.0 | % |
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
| | | Six months ended June 30, | |
| | | 2023 | | | 2022 | |
Contract Type | | Amount | | | Percentage | | | Amount | | | Percentage | |
Services time & materials | | $ | 3,600,335 | | | | 86.0 | % | | $ | 4,066,533 | | | | 60.3 | % |
Services fixed price over time | | | 204,804 | | | | 4.9 | % | | | 102,308 | | | | 1.5 | % |
Services combination | | | 66,180 | | | | 1.6 | % | | | 30,080 | | | | 0.4 | % |
Services fixed price per unit | | | 200,096 | | | | 4.8 | % | | | 145,601 | | | | 2.2 | % |
Third-party software | | | 113,330 | | | | 2.7 | % | | | 2,286,808 | | | | 33.9 | % |
Software support & maintenance | | | - | | | | - | % | | | 98,087 | | | | 1.5 | % |
Incentive payments | | | - | | | | - | % | | | 16,615 | | | | 0.2 | % |
Total revenue | | $ | 4,184,745 | | | | 100.0 | % | | $ | 6,746,032 | | | | 100.0 | % |
Contract Balances
Accounts Receivable
Trade accounts receivable are recorded at the billable amount where the Company is unablehas the unconditional right to resolve.
bill, net of allowances for doubtful accounts. The
Company reports revenue on both gross and net bases on a transaction by transaction analysis using authoritative guidance issued by the Financial Accounting Standards Board (the “FASB”). The Company considers the following factors to determine the gross versus net presentation: if the Company (i) acts as principal in the transaction; (ii) takes title to the products; (iii) has risks and rewards of ownership, such as the risk of lossallowance for
collection, delivery or return; and (iv) acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis. Generally, sales of third-party software products such as Adobe and Micro Focus products are reported on a gross basis with the Company acting as the principal in these arrangements. This determinationdoubtful accounts is based on the
Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized as of June 30, 2023 and December 31, 2022.Accounts receivable as of June 30, 2023 and December 31, 2022, consist of the following: 1)
| | | June 30, 2023 | | | December 31, 2022 | |
Billed federal government | | $ | 1,706,632 | | | $ | 1,573,407 | |
Billed commercial | | | - | | | | 56,152 | |
Unbilled receivables | | | 28,312 | | | | - | |
Accounts receivable | | $ | 1,734,944 | | | $ | 1,629,559 | |
Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.
Contract Liabilities
Contract liabilities consist of amounts that have been invoiced and for which the Company has inventory riskthe right to bill, but that have not been recognized as suppliersrevenue because the related goods or services have not been transferred. Changes in contracts liabilities balances in the three and six months ended June 30, 2023 and 2022, are not obligatedas follows:
Balance as of December 31, 2022 | | $ | 182,756 | |
| Contract liabilities added | | | - | |
| Revenue recognized | | | (55,665 | ) |
| Balance as of March 31, 2023 | | | 127,091 | |
Contract liabilities added | | | - | |
Revenue recognized | | | (55,088 | ) |
Balance as of June 30, 2023 | | $ | 72,003 | |
Balance as of December 31, 2021 | | $ | 186,835 | |
| Contract liabilities added | | | 19,280 | |
| Revenue recognized | | | (56,423 | ) |
| Balance as of March 31, 2022 | | | 149,692 | |
Contract liabilities added | | | 87,612 | |
Revenue recognized | | | (71,461 | ) |
Balance as of June 30, 2022 | | $ | 165,843 | |
Revenues recognized during the three months ended June 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $55,088 and $55,168, respectively. Revenues recognized during the six months ended June 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $110,753 and $111,591, respectively.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Deferred Costs of Revenue
Deferred costs of revenue consist of the costs of third-party support and maintenance contracts for enterprise server-based software. These costs are reported under the prepaid expenses and other current assets caption on the Company’s condensed consolidated balance sheets. The Company recognizes these direct costs ratably over time as it makes itself available to accept returns, 2) provide its performance obligation for software support, commensurate with its recognition of revenue. As of June 30,2023, and December 31, 2022 the Company had $0 of deferred costs of revenue. Changes in deferred costs of revenue balances for the three and six months ended June 30, 2022, are as follows:
Balance as of December 31, 2021 | | $ | 154,218 | |
Deferred costs added | | | 2,800 | |
Deferred costs expensed | | | (55,362 | ) |
Balance as of March 31, 2022 | | | 101,656 | |
Deferred costs expensed | | | (53,434 | ) |
Balance as of June 30, 2022 | | $ | 48,222 | |
Note 4.Leases
The Company has reasonable latitude, within economic constraints,two significant operating leases, one for its headquarters offices in establishing price, 3) Fairfax, Virginia and one for additional office space in Annapolis, Maryland. The leases both commenced in 2021 and have original lease terms ranging from 37 to 67 months and rental rates escalate by approximately 2.5% annually under both leases. The Company determines if an arrangement is a lease at inception.
As of June 30, 2023 and December 31, 2022, the Company indoes not have any sales-type or direct financing leases.
Each of the Company’s operating lease assets represent its marketing efforts, frequently aidsright to use an underlying asset for the customerlease term and the related lease liability represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement dates in determining product specifications, 4) the Company has physical losspresent value of lease payments. The operating lease assets also include any lease payments made and inventory risk as title transfers at the shipping point, 5) the Company bears full credit risk, and 6) the amount the Company earns in the transaction is neither a fixed dollar amount nor a fixed percentage. Generally, revenue derivedexclude lease incentives. Lease expense for facilitating a sales transaction of Adobe products in which a customer introduced by the Company makes a purchase directly from the Company’s supplier or another designated resellerlease payments is recognized on a netstraight-line basis whenover the commission payment is received since the Company is merely acting as an agent in these arrangements. Since the Company is notlease term. The Company’s lease agreements include rental payments escalating annually for inflation at a direct partyfixed rate. These payments are included in the sales transaction, payment by the supplier is the Company’s confirmation that the sale occurred.
For software and software-related multiple element arrangements, the Company must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionalityinitial measurement of the
delivered productsoperating lease liabilities and
services; (3) determineoperating lease assets. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.
The Company does not sublease any real estate to third parties.
As of June 30, 2023, our two operating leases had a weighted average remaining lease term of 29 months and a weighted average discount rate of 5.0%. Future lease payments under operating leases as of June 30, 2023, were as follows:
Remainder of 2023 | | $ | 115,438 | |
2024 | | | 174,721 | |
2025 | | | 74,804 | |
2026 | | | 70,220 | |
Total lease payments | | | 435,183 | |
Less: discount | | | (29,420 | ) |
Present value of lease liabilities | | $ | 405,763 | |
The total expense incurred related to its operating leases was $38,053 and $54,460 for the three months ended June 30,2023 and 2022, respectively, and $76,106 and $110,720 for the six months ended June 30,2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Note 5.Fair Value Measurements
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the firsttwo are considered observable and the last unobservable, that may be used to measure fair value which are the following:
| • | | Level 1—Quoted prices in active markets for identical assets or liabilities; |
| • | | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
| • | | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of each undelivered element using vendor-specific objective evidence ("VSOE"), June 30, 2023 and (4) allocateDecember 31, 2022:
| | | June 30, 2023 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 3,250 | | | $ | - | | | $ | - | | | $ | 3,250 | |
Contingent consideration receivable | | | - | | | | - | | | | 682,000 | | | | 682,000 | |
| | | December 31, 2022 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 58,242 | | | $ | - | | | $ | - | | | $ | 58,242 | |
As discussed in Note 2 above, in connection with its sale of GMI, the total price amongCompany received contingent consideration that requires to GMDC to make annual payments equal to five percent (5%) of the various elements. Changes in assumptions or judgments or changespurchaser’s GAAP based revenue through December 31, 2029, up to a cumulative maximum of $4,000,000, attributable to the elements in a software arrangement could cause a material increase or decrease inpurchaser’s blockchain-enabled digital supply chain management platform and associated technologies. The fair value of the amountcontingent consideration was estimated based on GMDC’s forecast of revenue, thatthe estimated after-tax payments to the Company, reports in a particular period.
The Company determines VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. The Company has established VSOE for its third-party software maintenance and support services.
The Company’s contracts with agencies of the U.S. federal government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract, ratably throughout the contract as the services are provided, or subject to funds made available incrementally by legislators. In evaluating the probability of funding for purposes of assessing collectability of the contract price, the Company considers its previous experiences with its customers, communications with its customers regarding funding status, and the Company’s knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is deemed probable.
Payments received in advance of services performed are recorded and reported as deferred revenue. Services performed prior to invoicing customers are recorded as unbilled accounts receivable and are presented on the Company’s balance sheets in the aggregate with accounts receivable.
Prompt payment discounts taken and expected to be taken by customers in conjunction with orders received under the Company’s General Services Administration Multiple Award Schedule (“GSA Schedule”) are reflected as a reduction in the Company’s revenue.
2.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB, or other standard setting bodies, that the Company adopts as of the specified effective date.
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (“ASU 2014-09”). In subsequent ASU’s, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers: Topic 606”, ASU 2016-08 "Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU 2016-10 "Identifying Performance Obligations and Licensing", ASU 2016-12 "Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients", and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (collectively “Topic 606”) to amend and clarify ASU 2014-09. This new set of standards will supersede nearly all existing revenue recognition guidance in GAAP. The core principle of Topic 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to receive for those goods and services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations 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. The standard allows entities to apply either of two adoption methods: (a) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within Topic 606 (“Retrospective Transition;” or (b) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per Topic 606. The effective date for Topic 606 is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
We will adopt the requirements of Topic 606 effective January 1, 2018, most likely using the Retrospective Transition method, whereby Topic 606 will be applied to the prior year as presented with the use of certain applicable practical expedients, and any effects on periods preceding the periods reported will appear as an adjustment to retained earnings as of the beginning of the earliest period reported. As the ASU supersedes substantially all existing revenue guidance affecting us under current GAAP, it will impact revenue and cost recognition across the whole of our business, as well as our business processes and our information technology systems.
We began our evaluation of the impact of Topic 606 in early 2017 by evaluating its impact on selected contracts of each type under which we operate. With this baseline understanding, we developed a project plan to evaluate the remainder of our contracts, develop processes and tools to dual-report financial results under both current GAAP and Topic 606, and assess the internal control structure in order to adopt Topic 606 on January 1, 2018. We have briefed our Audit Committee on our progress made towards adoption. Based on our progress to date, we anticipate being able to estimate the impacts of adopting Topic 606 on our operating results during the fourth quarter of 2017.
We currently operate under time-and-materials, fixed-price, fixed-price-per-unit, and fixed-term third-party software license and/or third-party software maintenance contracts. Some of these contracts involve more than one type of deliverable, which adds complexity to the application of Topic 606.
Under Topic 606, revenue will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). Given the nature of our professional services and the terms and conditions in our contracts, the customer generally obtains control as we perform work under the contract. Therefore, we expect to recognize revenue over time for substantially all of our professional services contracts, while we expect to recognize revenue over time, at a point in time, or some of each for our software sales contracts, based on what was sold and whether we have any continuing performance obligations, such as the obligation to provide first-line support under a maintenance contract supporting third-party software.
Under Topic 606, guidance related to principal versus agent considerations rely heavily on control of an asset before delivery over some of the considerations used under previous guidance, including the negotiation of selling price and credit risk of the seller. This will likely lead to the reclassification of a percentage of our software sales transactions to be reported on a net sales basis, rather than on a gross sales basis, as Topic 606 guidance shifts our responsibility from a principal seller to an agent. This reclassification will not affect the Company’s net operating results.
In February 2016, the FASB issued ASU 2016-02, “Leases: Topic 842,” which provided updated guidance on lease accounting. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that annual period, with early adoption permitted. The Company does not expect the adoption of this new standard will have a material impact on its financial statements. When adopted, the Company’s operating lease for office space will be presented as a right-of-use asset and as an offsetting liability for the present value of the contractual cash flows.after-tax payments based on discount rate that reflects the risk of achieving the timing and amounts of forecasted payments. The Company does not currentlysignificant inputs utilized in estimating the fair value of contingent consideration include the forecast of revenues, the income tax rate of 27.0 percent, and the discount rate of 40.75 percent.The following table is a roll-forward of the Level 3 fair value measurements.
Fair value of contingent consideration: | | | | |
December 31, 2022 | | $ | - | |
Additions | | | 682,000 | |
March 31, 2023 | | | 682,000 | |
Additions | | | - | |
June 30, 2023 | | $ | 682,000 | |
There were no unrealized gains or losses recognized in income for the three- or six-month periods ended June 30, 2023.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Note 6.Intangible Assets and Goodwill
Information regarding our intangible assets is as follows:
| | | Useful Life (Years) | | | December 31, 2022 | | | Additions | | | June 30, 2023 | |
Intangible assets with estimated useful lives | | | | | | | | | | | | | | | | |
Customer relationships | | | 8.0 | | | $ | 1,090,000 | | | $ | - | | | $ | 1,090,000 | |
Non-compete agreements | | | 3.0 | | | | 120,000 | | | | - | | | | 120,000 | |
Accumulated amortization | | | | | | | (308,217 | ) | | | (88,122 | ) | | | (396,339 | ) |
Sub-total | | | | | | | 901,783 | | | | (88,122 | ) | | | 813,661 | |
Intangible assets with indefinite lives | | | | | | | | | | | | | | | | |
Trade names | | Indefinite | | | | 280,000 | | | | - | | | | 280,000 | |
Net identifiable intangible assets | | | | | | $ | 1,181,783 | | | $ | (88,122 | ) | | $ | 1,093,661 | |
| | | Useful Life (Years) | | | December 31, 2021 | | | Additions | | | June 30, 2022 | |
Intangible assets with estimated useful lives | | | | | | | | | | | | | | | | |
Customer relationships | | | 8.0 | | | $ | 1,090,000 | | | $ | - | | | $ | 1,090,000 | |
Non-compete agreements | | | 3.0 | | | | 120,000 | | | | - | | | | 120,000 | |
Accumulated amortization | | | | | | | (131,973 | ) | | | (88,122 | ) | | | (220,095 | ) |
Sub-total | | | | | | | 1,078,027 | | | | (88,122 | ) | | | 989,905 | |
Intangible assets with indefinite lives | | | | | | | | | | | | | | | | |
Trade names | | Indefinite | | | | 280,000 | | | | - | | | | 280,000 | |
Net identifiable intangible assets | | | | | | $ | 1,358,027 | | | $ | (88,122 | ) | | $ | 1,269,905 | |
As of June 30, 2023, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows:
Remainder of 2023 | | $ | 88,122 | |
2024 | | | 146,307 | |
2025 | | | 136,248 | |
2026 | | | 136,248 | |
2027 | | | 136,248 | |
Thereafter | | | 170,488 | |
Total | | $ | 813,661 | |
Note 7.Stock-Based Compensation
We have any other material lease obligations.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” to provide additional guidance and reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.
3.
Stock-Based Compensation
During the nine months ended September 30, 2017, the Company had two shareholder–approvedthree stock-based compensation plans. The 2006 Stock Incentive Plan was adopted in 2006 (“ (“2006 Plan”) and had options granted under it through April 12, 2016. On June 1, The 2016 the shareholders ratified the IAI 2016 Stock Incentive Plan (“was adopted in 2016 (“2016 Plan”), which and had been approved by options granted under it through November 15, 2021. On October 11, 2021, the Board of Directors on April 4, 2016.
2016approved the 2021 Stock Incentive Plan
(“2021 Plan”) and on December 2, 2021, our shareholders approved the 2021 Plan.The 2016 Plan became effective June 1, 2016, and expires April 4, 2026. The 2016 Plan provides forCompany recognizes compensation costs on a straight-line basis over the grantingservice period of equity awards to key employees, including officers and directors. Options under the 2016 Plan are generally granted at-the-money or above, expire no later than ten years from the date of grant or within three months of when employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The number of shares subject to options available for issuance under the 2016 Plan cannot exceed 1,000,000. At September 30, 2017, there were unexpired options for 217,000 shares issued under the 2016 Plan.
2006 Stock Incentive Plan
The 2006 Plan became effective May 18, 2006, and expired April 12, 2016. The 2006 Plan provides for the granting of equity awards to key employees, including officers and directors. Options under the 2016 Plan were generally granted at-the-money or above, expire no later than ten years from the date of grant or within three months of when employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The number of shares subject to options available for issuance under the 2006 Plan could not exceed 1,950,000.awards. There were 1,071,000no option awards granted in the three and 1,193,500 unexpired options remaining fromsix months ended June 30, 2023 nor in the 2006 Plan at Septemberthree months ended June 30, 2017 and 2016, respectively.
The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense. When stock-based compensation is awarded to employees, the expense is recognized ratably over the vesting period. When stock-based compensation is awarded to non-employees, the expense is recognized over the period of performance. The fair2022. Fair values of option awards granted in the
three months and ninesix months ended
SeptemberJune 30, 2017 and 2016, 2022, were estimated using the Black-Scholes option pricing model
usingunder the following assumptions:
17
| | | | Three Months ended September 30, | | Nine months ended September 30, |
| | | | 2017 | 2016 | | 2017 | 2016 |
| Risk free interest rate | | | 1.87% | n/a | | 1.87% | 0.70% - 1.73% |
| Dividend yield | | | 0% | n/a | | 0% | 0% |
| Expected term | | | 5 years | n/a | | 5 years | 2-10 years |
| Expected volatility | | | 44.6% | n/a | | 44.6% | 34.9% - 50.4% |
A summaryWaveDancer, Inc. | Form 10-Q June 30, 2023 |
| | | 2022 | |
Risk-free interest rate | | 1.91% | - | 2.41% | |
Dividend yield | | | 0% | | |
Expected term (years) | | 5.75 | - | 6.00 | |
Expected volatility | | 45.8% | - | 46.1% | |
Determining the assumptions for the expected term and volatility requires management to exercise significant judgment. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the activity undertime-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, incentive plans asthe Company has elected to estimate its expected volatility by benchmarking its volatility to that of September 30, 2017,several public company issuers that operate within its market segment. The guideline companies’ volatility was increased by a size adjustment premium of 30% to compensate for the difference in size between the guideline companies and changes during the nine months then ended is presented below.
Incentive Options | |
Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | |
| Outstanding at January 1, 2017 | 1,313,000 | $0.22 | | |
| Granted | 217,000 | 0.35 | | |
| Exercised | - | - | | |
| Expired | (222,000) | 0.40 | | |
| Forfeited | (20,000) | 0.13 | | |
| Outstanding at September 30, 2017 | 1,288,000 | $0.21 | 5.3 | $63,528 |
| Exercisable at September 30, 2017 | 1,061,000 | $0.18 | 5.4 | $62,628 |
Company in its calculation.There were 217,000912,000 options with grant date fair values totaling $2,074,670 granted during the three months and ninesix months ended September June 30, 2017. The weighted-average grant date fair value of options granted during both the three months and nine months ended September 30, 2017, was $0.10, and the weighted-average grant date fair value of options granted during both the three months and nine months ended September 30, 2016, was $0.04.2022. There were nozero and 52,000 options exercised during the ninethree months ended SeptemberJune 30, 2017 2023, and 2016.2022, respectively. There were 20,000 and 157,000 options exercised during the six months ended June 30, 2023 and 2022, respectively. As of SeptemberJune 30, 2017, 2023, there was $15,009$591,946 of total unrecognized compensation cost related to non-vestednonvested share-based compensation arrangements granted under the stock incentive plans; that cost is expected to be recognized over a weighted-average period of four13 months.
Total compensation expense related to these plans was $6,908$88,159 and $2,857$358,936 for the quartersthree months ended June 30,2023 and 2022, respectively, and $376,331 and $588,902 for the six months ended June 30,2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.
Note 8.Settlement of Litigation
On April 28, 2023, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”). On January 25, 2023, Gerald, as the result of the termination of his employment, filed a lawsuit against the Company for one year’s severance of $150,000 and benefits to which he claimed he was entitled under his employment agreement with the Company. He had also claimed an anticipatory breach of the payment of $1,500,000 of deferred consideration otherwise due him on December 10, 2023, under the Stock Purchase Agreement between him and the Company and an anticipatory breach to release from escrow 436,481 shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement.
The Company filed an answer denying Gerald’s claims. In addition, the Company filed a counterclaim seeking damages from Gerald associated with the acquisition transaction and arising under the Stock Purchase Agreement.
The principal terms of the Settlement Agreement were:
| (a) | All amounts due to Gerald related to the GMI acquisition, including the $1,500,000 of deferred consideration, were deemed satisfied and such obligations were extinguished; |
| (b) | The Company removed restrictions from 436,481 shares of the Company’s common stock; |
| (c) | The Company paid Gerald $25,000 as reimbursement for legal costs; and, |
| (d) | Gerald and the Company agreed to mutual general releases of one another. |
As a result of the settlement, the Company recognized a gain, net of expenses, of $1,442,468.
Note 9.Revolving Line of Credit and Notes Payable
On September 30, 2017 and 2016, respectively, none of which related to options awarded to non-employees. Total compensation expense related to these plans was $7,230 and $8,329 for 2022, the nine months ended September 30, 2017 and 2016, respectively, none of which related to options awarded to non-employees. Compensation expense relating to prior periods in the amount of $612 was reversed in the nine months ended September 30, 2017, from options that were forfeited prior to vesting, and are not included in the total compensation expense above.
Nonvested option awards as of September 30, 2017 and changes during the nine months ended September 30, 2017 were as follows:
| | | Weighted average grant date fair value |
| Nonvested at January 1, 2017 | 45,000 | $0.07 |
| Granted | 217,000 | 0.10 |
| Vested | (15,000) | 0.06 |
| Forfeited | (20,000) | 0.04 |
| Nonvested at September 30, 2017 | 227,000 | $0.10 |
4.
Revolving line of Credit
The Company
hasentered a revolving line of credit with
a bank providingSummit Community Bank (“Summit”) that provided for
demandon-demand or short-term borrowings of up to
$1,000,000. $1,000,000 at a variable interest rate equal to the prime rate as published in The Wall Street Journal, with a minimum rate of 3.99% and a maximum rate of 20.00%, and subject to a borrowing base calculated using outstanding accounts receivable. Borrowings under the line
expires on May 31, 2018.of credit are secured by the assets of the Company. As of
September June 30, 2017, no amounts were2023, there was $1,000,000 outstanding under this line of credit.
The Company did not borrow againstThere we no borrowings or repayments during the three months ended June 30, 2023, and there were $575,000 of borrowings and no repayments during the six months ended June 30, 2023. As of June 30,2023, there is no borrowing availability under this line of
credit. On August 9, 2023 the Company repaid $500,000 on the line of credit. (See Note 13.) The line of credit
expires on August 16, 2023.WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Premium Financing Note Payable
The Company entered into a Premium Finance Agreement (“Premium Agreement”) on March 7, 2023, to purchase a one-year term directors and officers insurance policy. The Premium Agreement is for $305,759 at a fixed rate of 8.75% per annum, amortized over ten months. The Premium Agreement requires ten fixed monthly principal and interest payments of $31,815 from March 24, 2023 to December 24, 2023.
Note 10.Sales of Shares Under Common Stock Purchase Agreement
On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement” or "ELOC") and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, but not the obligation, to sell to B. Riley up to $15,000,000 of shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), from time to time. Sales of Common Stock to B. Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B. Riley under the Purchase Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of 1933, as amended (the “Securities Act”) the resale by B. Riley of up to 4,500,000 shares of Common Stock that the Company may issue or elect, in the last twelve months.
On August 11, 2022 and November 10, 2022, the Company issued to B. Riley 89,835 and 29,945 shares, respectively, as a commitment fee in accordance with the Purchase Agreement. The total value of the commitment fee shares was $150,000 and is included in prepaid expenses and other current assets on the unaudited consolidated condensed balance sheet as of December 31,2022. The commitment fee represents prepaid stock issuance cost and is being amortized to additional paid in capital as shares are sold under the Purchase Agreement. For the three- and six-month periods ended June 30,2023, the Company amortized $76,673 and $92,495 of the commitment fee, respectively.
During the three months ended June 30, 2023, there were no shares of common stock sold under the Purchase Agreement. During the six months ended June 30, 2023, the Company sold 74,286 shares of common stock to B. Riley at an average price of $0.72 per share, net of fees of approximately $0.04 per share. The net proceeds from these sales were $53,453. There were no sales under the Purchase Agreement during the three and six months ended June 30,2022.
Note 11.Income Taxes
For the three- and six-month periods ended June 30,2023 and 2022, the Company’s effective tax rate was 0%. The difference between the statutory tax rate and the effective tax rate is primarily driven by the presence of a full valuation allowance in all taxing jurisdictions.
5.
Income (Loss)Note 12.Earnings Per Share
Basic incomeearnings (loss) per share excludes dilution and is computed by dividing income (loss)the loss available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted incomeearnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss because the inclusion of such items would be antidilutive. The antidilutive effect of 52,655 shares and 26,774195,100 shares from stock options were excluded from diluted shares for the six-month period ended June 30,2023. The antidilutive effect of 711,537 shares from stock options and 146,269 shares from warrants were excluded from diluted shares for the three months ended June 30, 2022, and ninethe antidilutive effect of 713,035 shares from stock options and 239,779 shares from warrants were excluded from diluted shares for the six months respectively, ended SeptemberJune 30, 2016.
Note 13.Subsequent Events
On August 2, 2023, the Company sold 200,000 shares of common stock under the ELOC at a price of $0.59 per share, net of fees of $0.03 per share. The following isnet proceeds from this sale were $118,655.
On August 9, 2023, the Company and GMDC closed a reconciliationrollover stock purchase agreement and an amendment agreement to the Stock Purchase agreement dated March 17, 2023, wherein the Company had sold effectively 75.1% of the amounts usedequity of GMI to GMDC (the "Agreement"). The rollover stock purchase agreement and the amendment agreement together provide for the following:
| ● | The termination of the rights and obligations under the Agreement with respect to the calculation and payment of future contingent payments from GMDC to the Company, in exchange for the payment of $1,000,000 cash by GMDC to the Company; |
| ● | The sale by the Company, to certain of GMDC's investors, of all of its common stock of GMDC, in exchange for cash of $400,000; and, |
| ● | The termination of various ongoing rights and obligations of the Company and GMDC established in the Agreement and ancillary agreements entered into in connection with the Agreement. |
As a result of this transaction, the Company will recognize a gain of approximately $382,525. As of August 9, 2023 the Company has no remaining investment or financial interest in calculating basic and diluted net income (loss) per common share:
| | | | |
| Basic net income per common share for the three months ended September 30, 2017: | | | |
| Income available to common stockholders | $110,284
| 11,201,760 | $0.01 |
| Effect of dilutive stock options | - | 308,951
| - |
Diluted net income per common share for the three months ended September 30, 2017 | $110,284
| 11,510,711
| $0.01 |
| | | | |
Basic net loss per common share for the three months ended September 30, 2016: | | | |
| Loss available to common stockholders | $(57,238) | 11,201,760 | $(0.01) |
| Effect of dilutive stock options | - | - | - |
Diluted net loss per common share for the three months ended September 30, 2016 | $(57,238) | 11,201,760 | $(0.01) |
| | | | |
Basic net income per common share for the nine months ended September 30, 2017: | | | |
| Income available to common stockholders | $167,386
| 11,201,760 | $0.01 |
| Effect of dilutive stock options | - | 307,442
| - |
Diluted net income per common share for the nine months ended September 30, 2017 | $167,386
| 11,509,202
| $0.01 |
| �� | | | |
Basic net loss per common share for the nine months ended September 30, 2016: | | | |
| Loss available to common stockholders | $(413,265) | 11,201,760 | $(0.04) |
| Effect of dilutive stock options | - | - | - |
Diluted net loss per common share for the nine months ended September 30, 2016 | $(413,265) | 11,201,760 | $(0.04) |
GMDC or GMI.Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in the principal or most advantageous market in an orderly transaction. To increase consistency and comparability in fair value measurements, the FASB established a three-level hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of fair value measurements are:
●
Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
●
Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.19
●
Level 3—Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
The inputs used in measuring the fair value of cash and cash equivalents are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of the Company’s funds. The fair value of short-term financial instruments (primarily cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities) approximate their carrying values because of their short-term nature.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements regarding our business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements. Investors should read and understand the risk factors detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 (“2016 10-K”Annual Report”) and in other filings with the Securities and Exchange Commission.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This list highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs,occur, our business, financial condition and operating results would likely suffer. These risks include, among others, the following:
●
changes in the funding priorities of the U.S. federal government;
●
changes in the way the U.S. federal government contracts with businesses;
●
terms specific to U.S. federal government contracts;
●
our failure to keep pace with a changing technological environment;
●
intense competition from other companies;
●
inaccuracy in our estimates of the cost of services and the timeline for completion of contracts;
●
non-performance by our subcontractors and suppliers;
●
our dependence on third-party software and software maintenance suppliers;
●
fluctuations in our results of operations and the resulting impact on our stock price;
●
the limited public market for our common stock;
●
changes in the economic health of our non U.S. federal government customers; and
●
our forward-looking statements and projections may prove to be inaccurate.
| ● | We have had operating losses in three of each of the last four years and may not achieve or maintain profitability in the future. |
| ● | A portion of our revenue is expected to be generated by sales to government entities, which are subject to a number of challenges and risks. |
| ● | We face intense competition and could lose market share to our competitors, which could adversely affect our business, financial condition, and results of operations. |
| ● | We rely on our management team and other key employees and will need additional personnel to grow our business, and the loss of one or more key employees or our inability to hire, integrate, train and retain qualified personnel, including members for our board of directors, could harm our business. |
| ● | We are dependent on a few key customer contracts for a significant portion of our future revenue, and a significant reduction in services to one or more of these contracts would reduce our future revenue and harm our anticipated operating results. |
| ● | We are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations. |
| ● | We depend on computing infrastructure operated by Microsoft and other third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations. |
| ● | Failure to comply with governmental laws and regulations could harm our business. |
| ● | We are subject to risks associated with our strategic investments, and impairments in the value of our investments could negatively impact our financial results. |
| ● | Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business. |
| ● | The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members. |
| ● | If we are not able to maintain and enhance our brand and our reputation as a provider of high-quality security solutions and services, our business and results of operations may be adversely affected. |
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A of our 20162022 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Our Business
Founded in 1979 IAIas Information Analysis Incorporated, the Company changed its name to WaveDancer, Inc. and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is in the business of modernizing client information systems, developing and maintaining information technology (“IT”) systems, developing electronic forms,modernizing client information systems, and performing consultingother IT-related professional services to government and commercial organizations. We have performed software conversion projects
On March 17, 2023, the Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). The Company’s retained interest in GMI of 24.9% is accounted for over 100 commercial and government customers, including Computer Sciences Corporation, IBM, Computer Associates, Sprint, Citibank, U.S. Department of Homeland Security, U.S. Treasury Department, U.S. Department of Agriculture, U.S. Department of Education, U.S. Department of Energy, U.S. Army, U.S. Air Force, U.S. Department of Veterans Affairs,as an equity method investment. Subsequent to the sale the Company discontinued consolidating GMI and the Federal Deposit Insurance Corporation. Today,Company has reflected GMI as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures throughout this Item 2 relate to the Company’s continuing operations. See Note 2 to the unaudited condensed consolidated financial statements for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation.
The Company is an IT provider primarily for the benefit of federal government agencies. At present, we primarily apply our technology, services and experience to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, data analytics, and we are in the process of acquiring talent and expertise in developing cybersecurity and cloud services practices. Our focus is on enterprise IT solutions primarily relating to system modernization, cloud-based solutions and cybersecurity protection.
Since the Company’s inception, we have performed software development and conversion projects for over 100 commercial companies and government agencies,customers including, but not limited to, the Department of Agriculture, Department of Defense, Department of Education, Department of Homeland Security, Department of the Treasury, U.S. Small Business Administration, U.S. Army, U.S. Air Force, Department of Veterans Affairs, and to developingGeneral Dynamics Information Technology (formerly Computer Sciences Corporation, CSRA).
Modernization has been a core competency of the Company for over 20 years. We have modernized over 100 million lines of COBOL code for over 35 governmental and commercial customers. We maintain a pool of skilled COBOL programmers. This provides us with a competitive advantage as the labor pool of such programmers is shrinking as aging software professionals retire. Our business has also historically relied upon the reselling of applications, primarily for forms development.
Through our acquisition in April 2021 of Tellenger, Inc. (“Tellenger”), which is now a wholly owned subsidiary of the Company, we acquired competencies in web-based solutions for agenciesand cybersecurity. Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics. We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud. We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized. It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the U.S. federal government.
At the end of second quarter 2017, IAI was awarded an ISO 9001:2015 Management System certificate by SRI Quality System Registrar (SRI) for the provisioning and management of certain services and product delivery to its customers. This process for certification was initiatedgrowth in the
latter halfcybersecurity market.In December 2021, we announced the reorganization of 2016. Many government agencies are now requiring this certificationour entire professional services practice into Tellenger, and as a basis for participatingresult, our professional services are contained in designated contract solicitations. ISO 9001:2015 is a process-based certification recognizing organizations that can linksingle entity. Through Tellenger, we perform services such as business objectives with operating effectivenessprocess re-engineering, cloud migrations, and institutionalize continual improvement in its operations. In order to achieve certification, IAI was required to demonstrate through external audit our ability to consistently provide products and services that meet customer and applicable statutory and regulatory requirements set forthSoftware-as-a-Service (“SaaS”) implementations on behalf of clients in the referenced ISO 9001:2015 standard. Companies thatprivate and public sector with an aim to increase productivity, gain efficiencies, and achieve such certification have demonstrated effective implementation of documentation and records management, top management’s commitmentkey performance indicators. Tellenger is appraised at Capability Maturity Model Integration (CMMI) Level 3.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Our Strategy
Our strategy is to their customers, establishment of clear policy, good planning and implementation, good resource management, efficient process control,grow our business organically as well as measurementthrough acquisitions. Through the acquisition of Tellenger, Inc. in 2021, we began to reposition our legacy professional services business by allocating resources away from third-party product reselling and analysis.
Intoward professional services, which management viewed as higher margin. To grow organically, we have hired and plan to continue to hire, business development personnel and intend to become more proactive in bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.Results of Continuing Operations – Three Months Ended June30, 2023 and 2022
Revenue
Total revenue was $2,024,622 for the three months ended SeptemberJune 30, 2017,2023, compared with $3,750,520 in the prior year quarter, a decrease of $1,725,898, or 46.0%. The decrease in revenue was driven by our prime contracts with U.S. government agencies generated 67.4%de-emphasis of third-party software sales which accounted for just 2.8% of our sales in the second quarter of 2023 as compared to 39.3% in the prior year quarter. Professional services revenue subcontracts under federal procurements generated 27.7%decrease by 13.6% to $1,967,957 in the second quarter of our2023 from $2,277,832 in the second quarter of 2022. The decline in professional services revenue and 4.9% of our revenue came from commercial contracts. The terms of these contracts and subcontracts vary from single transactions to five years. Within this group of prime contracts with U.S. government agencies,is driven primarily by one software sale generated 23.9%modernization project where we had fewer resources deployed in the second quarter of our revenue and one other contract generated 12.0% of our revenue. One subcontract generated2023 as compared to the comparable prior year quarter based on current project deliverables.
Gross Profit
Gross profit decreased by $198,828 or 22.0% of our revenue.
In the nine months ended September 30, 2017, our prime contracts with U.S. government agencies generated 72.2% of our revenue, subcontracts under federal procurements generated 22.1% of our revenue, and 5.7% of our revenue came from commercial contracts. The terms of these contracts and subcontracts vary from single transactions, to five years. Within this group of prime contracts with U.S. government agencies, one non-recurring software sale generated 20.4% of our revenue, another software sale generated 10.2% of our revenue, and one professional fees contract generated 12.0% of our revenue. One subcontract generated 16.6% of our revenue.
In$705,013 for the three months ended
SeptemberJune 30,
2016, our prime2023 as compared to $903,841 in the prior year quarter. The decrease in gross profit includes a decrease from professional services of $149,008 and from third-party software sales of $49,820. Professional services gross profit as a percent of revenue declined from 37.5% to 35.8% due to a change in the mix of contracts
with U.S. government agencies generated 77.2% of our revenue, subcontracts under federal procurements generated 9.2% of ourgenerating revenue and
13.6%the related billing rates resulting as well as increases in our costs of
our revenue came from commercial contracts. labor that outpaced billing rate increases.Selling, General and Administrative Expenses
The termsfollowing table shows the major elements of these contracts and subcontracts varied from single transactions to five years. Within this group of prime contracts with U.S. government agencies,SG&A expenses for the three contracts generated 16.2%, 10.4%, and 9.3% of our revenue, respectively.
In the nine months ended
SeptemberJune 30,
2016, our prime contracts with U.S. government agencies generated 73.7% of our revenue, subcontracts under federal procurements generated 12.6% of our revenue,2023 and
13.7% of our revenue came2022 and the changes between periods:| | | 2023 | | | 2022 | | | Increase/
(Decrease) | |
Salaries and benefits | | $ | 528,573 | | | $ | 765,710 | | | $ | (237,137 | ) |
Stock based compensation | | | 88,159 | | | | 343,492 | | | | (255,333 | ) |
Legal and professional fees | | | 343,042 | | | | 424,866 | | | | (81,824 | ) |
Depreciation & Amortization | | | 53,669 | | | | 55,824 | | | | (2,155 | ) |
Acquisition costs | | | 336,141 | | | | 356,159 | | | | (20,018 | ) |
Software, IT and office expenses | | | 93,802 | | | | 115,923 | | | | (22,121 | ) |
Governance and investor relations | | | 72,365 | | | | 117,417 | | | | (45,052 | ) |
Insurance | | | 98,111 | | | | 81,301 | | | | 16,810 | |
Marketing and promotions | | | (7,967 | ) | | | 41,138 | | | | (49,105 | ) |
All other | | | 48,470 | | | | 201,281 | | | | (152,811 | ) |
Total SG&A | | $ | 1,654,365 | | | $ | 2,503,111 | | | $ | (848,746 | ) |
Operating Income from commercial contracts. The terms of these contracts and subcontracts variedContinuing Operations
Our operating income from single transactions to five years. Within this group of prime contracts with U.S. government agencies, two contracts generated 18.5% and 11.4% of our revenue, respectively. One commercial customer accounted for 9.0% of our revenue.
We sold third party software and maintenance contracts under agreements with two major suppliers. These sales accounted for 49.3% of total revenuecontinuing operations was $493,116 in the thirdsecond quarter of 2017 and 56.4% of revenue in the third quarter of 2016.
We sold third party software and maintenance contracts under agreements with two major suppliers. These sales accounted for 55.5% of total revenue in the first nine months of 2017 and 50.1% of revenue in the first nine months of 2016.
Three Months Ended September 30, 2017 versus Three Months Ended September 30, 2016
Revenue
Our revenues in the third quarter of 2017 were $2,731,7942023 as compared to
$2,031,553a loss of $1,599,270 in the corresponding quarter in
2016,2022, an
improvement of $2,092,386. The increase
in income from continuing operations is primarily the result of
$700,241, or 34.5%. Professional feea gain on the settlement of litigation of $1,442,468 and the decrease in SG&A expenses of $848,746, as shown above, partially offset by the decrease in gross profit of $198,828.WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Results of Discontinued Operations – Three Months Ended June30, 2023 and 2022
The sale of GMI to GMDC occurred on March 17, 2023, and as a result, there was no activity for GMI in the second quarter of 2023. Following is the detail of discontinued operations for the second quarter of 2022:
| | | 2022 | |
Revenue | | $ | 566,862 | |
Cost of revenue | | | 540,921 | |
Gross profit | | | 25,941 | |
Operating expenses - | | | | |
Salaries and benefits | | | 378,431 | |
Depreciation and amortization | | | 306,917 | |
Stock based compensation | | | 170,629 | |
Other operating expenses | | | 237,460 | |
Change in fair value of contingent consideration | | | (942,609 | ) |
Gain on disposal of business | | | - | |
Loss before income tax benefit | | | (124,887 | ) |
Income tax benefit | | 521,338 | |
Net income on discontinued operations | | $ | 396,451 | |
Results of Continuing Operations – Six Months Ended June30, 2023 and 2022
Revenue
Total revenue was $1,385,257 in$4,184,745 for the third quarter of 2017 versus $885,505six months ended June 30, 2023, compared with $6,746,032 in the corresponding quarterprior year period, a decrease of $2,561,287, or 38.0%. The decrease in 2016, an increase of $499,752, or 56.4%, and software revenue was $1,346,537driven primarily by our de-emphasis of third-party software sales which accounted for just 2.7% of our sales in the thirdsix months ended June 30, 2023, as compared to 35.6% in the six months ended June 30, 2022. Professional services revenue decreased by 6.3% to $4,071,415 for the six months ended June 30, 2023, from $4,344,522 in the corresponding six months of 2022. The decline in professional services revenue arose in the second quarter and is driven primarily by one software modernization project where we had fewer resources deployed in the second quarter of 2017 versus $1,146,0482023 as compared to the comparable prior year quarter based on current project deliverables.
Gross Profit
Gross profit decreased by $238,500 or 14.9%, to $1,361,811 for the six months ended June 30, 2023, as compared to $1,600,311 in the third quarter of 2016, an increase of $200,489, or 17.5%. Revenueprior year. The decrease in gross profit includes a decrease from professional fees increased due primarily to one new subcontract under a federal procurement, though there were several minor increasesservices of $167,048 and decreases in activity under our other professional services contracts. The increase in our software revenue in 2017 versus the same period in 2016 is due to the non-recurring nature of many of ourfrom third-party software sales transactions. Software sales and associated margins are subjectof $71,452. Professional services gross profit as a percent of revenue declined from 35.2% to considerable fluctuation from period to period, based on the product mix sold and referral fees earned. The revenue recognized for the same volume of software sales activity would be significantly less in 2018 and beyond upon the adoption of Topic 606, discussed above, wherein revenue from many of our software sales transactions will be reported net of the direct costs33.4% due to a redefinition of “control” of the software productchange in the coursemix of the software sales transactions.
Gross Profit
Gross profit was $635,891, or 23.3% of revenue in the third quarter of 2017 versus $556,085, or 27.4% of revenue in the third quarter of 2016. For the quarter ended September 30, 2017, $608,853 of the gross profit was attributable to professional fees at a gross profit percentage of 44.0%, and $27,038 of the gross profit was attributable to software sales at a gross profit percentage of 2.0%. In the same quarter in 2016, we reported gross profit for professional fees of $416,949, or 47.1%, of professional feecontracts generating revenue and
gross profitthe related billing rates resulting as well as increases in our costs of
$139,136, or 12.1% of software sales. Gross profit from professional fees increased with the increase in revenue. Gross profit on software sales decreased in terms of dollars and as a percentage of sales due to a decrease in referral fees for facilitating third-party sales, for which there were no direct costs incurred by us. The referral fees for facilitating third party sales were $7,497 for the third quarter of 2017 versus $114,686 in the same period of 2016. Software product sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold and referral fees earned.labor that outpaced billing rate increases.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Selling, General and Administrative Expenses
Selling, generalThe following table shows the major elements of SG&A expenses for the six months ended June 30, 2023 and administrative expenses, exclusive2022 and the changes between periods:
| | | 2023 | | | 2022 | | | Increase/
(Decrease) | |
Salaries and benefits | | $ | 1,094,916 | | | $ | 1,411,200 | | | $ | (316,284 | ) |
Stock based compensation | | | 376,330 | | | | 573,458 | | | | (197,128 | ) |
Legal and professional fees | | | 587,911 | | | | 1,023,189 | | | | (435,278 | ) |
Depreciation & Amortization | | | 107,827 | | | | 112,380 | | | | (4,553 | ) |
Acquisition costs | | | 444,518 | | | | 790,861 | | | | (346,343 | ) |
Software, IT and office expenses | | | 179,344 | | | | 248,398 | | | | (69,054 | ) |
Governance and investor relations | | | 207,538 | | | | 279,104 | | | | (71,566 | ) |
Insurance | | | 164,046 | | | | 106,951 | | | | 57,095 | |
Marketing and promotions | | | 868 | | | | 73,367 | | | | (72,499 | ) |
All other | | | 102,595 | | | | 257,735 | | | | (155,140 | ) |
Total SG&A | | $ | 3,265,893 | | | $ | 4,876,643 | | | $ | (1,610,750 | ) |
Operating Loss from Continuing Operations
Our operating loss from continuing operations was $461,614 for the first half of sales commissions, were $386,929, or 14.2%2023 as compared to $3,276,332 for the first half of revenues,2022, a decrease in the third quarterloss of 2017 versus $428,852,$2,814,718 or 21.1% of revenues,85.9%. The decrease in the third quarter of 2016. These expenses decreased $41,923, or 9.8%,loss from operations is primarily the third quarter of 2016. These decreases are largely from decreases in sales labor costs, bad debts, technical training costs, and advertising and promotion. These decreases were offset some by increases in overhead labor and the cost of obtaining and maintaining our ISO 9001 certification.
Commission expense was $140,963, or 5.2% of revenues, in the third quarter of 2017 versus $187,030, or 9.2% of revenues, in the third quarter of 2016. Commissions are driven by varying factors and are earned at varying rates for each salesperson.
Net income
Net income for the three months ended September 30, 2017, was $110,284, or 4.0% of revenue, versus net loss of $57,238, or (2.8%) of revenue, for the same period in 2016.
Nine months Ended September 30, 2017 versus Nine months Ended September 30, 2016
Revenue
Our revenues in the first nine months of 2017 were $8,269,558 compared to $5,322,573 in the corresponding nine-month period in 2016, an increase of $2,946,985, or 55.4%. Professional fee revenue was $3,676,730 in the first nine months of 2017 versus $2,655,006 in the corresponding nine months in 2016, an increase of $1,021,724, or 38.5%, and software revenue was $4,592,828 in the first nine months of 2017 versus $2,667,567 in the first nine months of 2016, an increase of $1,925,261, or 72.2%. Revenue from professional fees increased due primarily to one new subcontract under a federal procurement, though there were several minor increases and decreases in activity under our other professional services contracts. The increase in our software revenue in 2017 versus the same period in 2016 is due to the non-recurring nature of many of our software sales transactions. One software sales transaction accounted for $1,686,952result of the increase. Software sales and associated margins are subject to considerable fluctuation from period to period, basedgain on litigation settlement of $1,442,468 along with the product mix sold and referral fees earned. The revenue recognized fordecrease in decrease in SG&A expenses of $1,610,750, as shown above, partially offset by the same volume of software sales activity would be significantly lessdecrease in 2018 and beyond upon the adoption of Topic 606, discussed above, wherein revenue from many of our software sales transactions will be reported net of the direct costs due to a redefinition of “control” of the software product in the course of the software sales transactions.
Gross Profit
Gross profit was $1,773,076, or 21.4% of revenue in the first nine months of 2017 versus $1,439,504, or 27.0% of revenue in the first nine months of 2016. For the nine months ended September 30, 2017, $1,686,347 of the gross profit was attributable to professional fees at a gross profit percentage of 45.9%, and $86,729 of the gross profit was attributable to software sales at a gross profit percentage of 1.9%. In the same nine months in 2016, we reported gross profit for professional fees of $1,145,725, or 43.2%, of professional fee revenue, and gross profit of
$293,779, or 11.0%$238,500.Results of software sales. Gross profit from professional fees increased with the increase in revenue,Discontinued Operations – Six Months Ended June30, 2023 and increased as a percentage2022
The sale of sales dueGMI to the timing of revenue recognition versus the accumulation of direct costsGMDC occurred on a certain fixed price contract, as well as the timing of revenue recognition versus the accumulation of direct costs of some at-risk work performed in early 2016. Gross profit on software sales decreased in terms of dollarsMarch 17, 2023, and as a percentageresult we had approximately two fewer weeks of sales due to a decrease in referral feescosts and expenses for facilitating third-party sales, for which there were no direct costs incurred by us. The referral fees for facilitating third party sales were $19,612GMI for the first nine monthsquarter of 2017 versus $239,2212023 as compared to the first quarter of 2022, and no activity for the second quarter of 2023 as compared to a full second quarter in 2022, as follows:
| | | 2023 | | | 2022 | | | Increase/
(Decrease) | |
Revenue | | $ | - | | | $ | 566,862 | | | $ | (566,862 | ) |
Cost revenue | | | 74,223 | | | | 861,327 | | | | (787,104 | ) |
Gross profit | | | (74,223 | ) | | | (294,465 | ) | | | 220,242 | |
Operating expenses - | | | | | | | | | | | | |
Salaries and benefits | | | 484,249 | | | | 613,278 | | | | (129,029 | ) |
Depreciation and amortization | | | 85,338 | | | | 613,705 | | | | (528,367 | ) |
Stock based compensation, before forfeitures | | | 65,487 | | | | 252,839 | | | | (187,352 | ) |
Forfeiture of stock options | | | (407,322 | ) | | | - | | | | (407,322 | ) |
Other operating expenses | | | 134,633 | | | | 389,126 | | | | (254,493 | ) |
Change in fair value of contingent consideration | | | - | | | | (930,000 | ) | | | 930,000 | |
Gain on disposal of business | | | (100,615 | ) | | | - | | | | (100,615 | ) |
Loss before income tax benefit | | | (335,993 | ) | | | (1,233,413 | ) | | | 897,420 | |
Income tax benefit | | | - | | | | 1,710,917 | | | | (1,710,917 | ) |
Net income (loss) on discontinued operations | | $ | (335,993 | ) | | $ | 477,504 | | | $ | (813,497 | ) |
Critical Accounting Estimates
Our accounting policies are described in Note 1 of our consolidated financial statements – Organization and Summary of Significant Accounting Policies. Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 except for two new fair value measures for the first quarter of 2023:
1) the determination of the fair value of the contingent consideration receivable from GMDC, as discussed in Notes 2 and 5 to the accompanying consolidated financial statements, and
2) the determination of the initial fair value of our equity method investment in GMDC as of March 17, 2023.
The determination of the fair value of the contingent consideration is a recurring fair value measure at the end of each reporting period and includes significant judgmental inputs not observable in the same periodmarket. Significant judgment was employed in determining the assumptions used in the determination of 2016. Software product salesfair value as of March 31, 2023 and, associated margins are subject to considerable fluctuation from period to period, basedaccordingly, changes in assumptions could have a material impact on the product mix sold and referral fees earned.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, exclusive of sales commissions, were $1,231,863,increase or
14.9% of revenues,decrease in the
first nine monthsfair value of
2017 versus $1,451,423, or 27.3%contingent consideration recorded in any given period.Equity Method Investment in GMDC
The Company received 993,768 common shares of revenues,GMDC representing 19.0 percent of the fully diluted capitalization. Prior to closing the acquisition on March 17 and through March 31, 2023, GMDC raised $3,000,000 by issuing Series A preferred shares at $1.00 per share representing 57.2 percent of the fully diluted capitalization. The Series A transaction was considered by the Company to be the most reliable indication of the fair value of total equity of GMDC. We utilized an option pricing model backsolve method (“OPM Backsolve”) to solve for the total equity value that results in a value of Series A equal to its issuance price, and to estimate the fair value of common shares. The significant inputs utilized in the first nine monthsOPM Backsolve include an estimated time to exit of 2016. These expenses decreased $219,560, or 15.1%, from the first nine monthsfour years, an estimated volatility of 2016. These decreases are largely from decreases in sales labor costs, decreases in technical training costs, decreases in legal fees, decreases in bad debt expense,75.0 percent, and decreases in advertising and business promotion costs. These decreases were offset some by increases in overhead labor and the costa risk-free rate of obtaining and maintaining our ISO 9001 certification.
Commission expense4.29 percent. A minority interest discount of 23.5% was $380,267, or 4.6% of revenues, in the first nine months of 2017 versus $408,695, or 7.7% of revenues, in the first nine months of 2016. Commissions are driven by varying factors and are earned at varying rates for each salesperson.
Net income
Net income for the nine months ended September 30, 2017, was $167,386, or 2.0% of revenue, versus net loss of $413,265, or (7.8%) of revenue, for the same period in 2016.
also applied.Liquidity and Capital Resources
Our cash and cash equivalents balance, when combined with our cash flow from operations duringOn June 30, 2023, the first nine monthsCompany had a net working capital deficit of 2017, were sufficient to provide financing for our operations. Our net cash provided by the combination of our operating and investing activities in the first nine months of 2017 was $655,347. This net cash, when added to a beginning balance of $1,895,372, yielded$780,357, including cash and cash equivalents of $2,550,719 as of September 30, 2017. Accounts receivable increased $651,813, due primarily to software sales that occurred just prior to September 30, 2017, the end of the U.S. federal government’s fiscal year. Prepaid expenses$338,300 and other current assets decreased $170,033 due primarily to the allocation over time of prepaid expenses associated with the maintenance contracts on software sales. Deferred revenue decreased $165,569 due primarily to the recognition of revenue over time from the same maintenance contracts on software sales. Commissions payable decreased $95,668 due to payouts of existing commissions payable balances occurring faster than new commissions were earned.
We have a revolving$1,000,000 outstanding under its line of credit with Summit bank. For the six months ended June 30, 2023, we have generated a bank providing for demand or short-term borrowingsnet loss from continuing operations of up$779,174. As discussed below, our ability to $1,000,000. The line expires on May 31, 2018. As of September 30, 2017, no amounts were outstanding under this line of credit. We did not borrow against this line of credit in the last twelve months.
Given our currentgenerate sufficient cash
position and operating plan, we anticipate that we will be ableflows to meet our
cash requirementsobligations for the twelve months following the issuance of these financial statements is dependent upon factors which are sufficiently outside of management’s control as to cast substantial doubt about our ability to continue as a going concern.The Company will need to raise additional capital to grow its business either organically or through acquisition. The Company is also pursuing strategic alternatives which include the potential merger or sale of the Company. There is no assurance that our efforts will result in any transactions or provide additional capital, which creates substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying financial statements are issued. We estimate that by the first quarter of 2024, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements.
We used cash for continuing operations of $389,177 during the second quarter of 2023 and anticipate that over the twelve months from the date of filingthese financial statements our operating activities may use as much as approximately $1.0 million to $1.5 million. On August 9, 2023, the Company received $1,400,000 of this Form 10-Q.
We presently lease our corporate officescash from GMDC as proceeds from the sale of the common stock of GMDC held by the Company and in satisfaction of the contingent consideration receivable due from GMDC to the Company. On August 9, 2023, the Company repaid $500,000 on a contractual basis with certain timeframe commitmentsthe Summit line of credit and obligations. We believe that our existing offices will be sufficienthas no further borrowing capacity thereunder. The line of credit expires on August 16, 2023, and the Company and Summit are finalizing an extension of the expiration date to meet our foreseeable facility requirement. Should we need additional space to accommodate increased activities, management believes we can secure such additional space on reasonable terms.
We haveDecember 31, 2023, by which time the the remaining balance of $500,000 is due. The Company has no material commitments for capital spending nor any plans for material capital expenditures.
We have no off-balance sheet arrangements.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
Item 4.
4.Controls and Procedures
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and people performing similar functions, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of SeptemberJune 30, 20172023 (the “Evaluation Date”). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
disclosure.Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 2017,2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Because of the inherent limitations in all control systems, no control system can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of a person, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Notwithstanding these limitations, we believe that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
On January 25, 2023, Jeffrey Gerald, the individual from whom the Company purchased all the outstanding shares of GMI, filed a lawsuit against the Company in the Superior Court of the State of Delaware. In this case, Gerald sued for the one year’s severance of $150,000 and benefits to which he claims he is entitled under his employment agreement with the Company. He has also claimed an anticipatory breach of the payment of $1,500,000 of deferred consideration otherwise due him on December 10, 2023, under the Stock Purchase Agreement between him and the Company and the anticipatory breach to release from escrow 436,481 shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement.
The Company filed an answer denying Gerald’s claims. In addition, the Company filed a counterclaim seeking damages from Gerald associated with the acquisition transaction and arising under the Stock Purchase Agreement. The Company’s counterclaim does not specify the damages being sought.
On April 28, 2023, the Company and Gerald executed an agreement to settle the litigation between them. See Note 8 to the unaudited condensed consolidated financial statements for the principal terms of the settlement.
Other than the foregoing, there are no pending legal proceedings to which we are a party or to which any of our property is subject and, to the best of our knowledge, no such actions against us are contemplated or threatened.
Item 1A. Risk Factors
“Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 20162022, as amended, includes a discussion of our risk factors. There have been no material changes from the risk factors described in our annual report on Form 10-K for the year ended December 31, 2016.2022.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| |
| None. |
Item 3. | Defaults Upon Senior Securities |
| |
| None. |
Item 4. | Mine Safety Disclosures |
| |
| Not applicable |
Item 5. | Other Information |
| |
| None. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
10.16 1.1 | Eighth Settlement Agreement and General Release by and between Jeffrey Gerald and WaveDancer, Inc. | | Incorporated by reference to the Company’s Form 8-K filed on May 4, 2023 |
10.1 | Stock Purchase Agreement dated as of March 17, 2023 by and between the Company and Gray Matters Data Corp. | | Incorporated by reference to the Company’s Form 8-K filed on March 21, 2023 |
| 10.2 | Amendment No. 1 to LoanStock Purchase Agreement regarding Line of Credit Agreement with TD Bank, N.A., successor to Commerce Bank, N.A.by and between the Company and Gray Matters Data Corp., dated May 28, 2017.August 9, 2023 | | Filed with this Form 10-Q |
| 10.3 | Rollover Stock Purchase Agreement by and among WaveDancer, Inc., Gray Matters Data Corporation, and StealthPoint Fund I, LP, et al. dated August 9, 2023 | | Filed with this Form 10-Q |
31.1 | Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 | | Filed with this Form 10-Q |
| Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 | | Filed with this Form 10-Q |
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed with this Form 10-Q |
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed with this Form 10-Q |
101.INS | Inline XBRL Instance Document | | Filed with this Form 10-Q |
101.SCH | Inline XBRL Taxonomy Extension Schema | | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) | | |
WaveDancer, Inc. | Form 10-Q June 30, 2023 |
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Information Analysis Incorporated
| | WaveDancer, Inc. (Registrant) | |
| | | | |
Date: November 13, 2017
| By: | /s/Sandor Rosenberg
| |
| Date: | August 11, 2023 | | Sandor Rosenberg, Chairman of the
Board, Chief Executive Officer,
and President
| /s/ G. James Benoit, Jr. | |
| | | | |
| Company NameG. James Benoit, | |
| | | | |
Date: November 13, 2017
| By: | /s/Richard S. DeRose
Chief Executive Officer | |
| | | Richard S. DeRose, Executive Vice
President, Treasurer, and Chief
Name | | | |
| | | Title | | | |
| Date: | August 11, 2023 | | By: | /s/ Timothy G. Hannon | |
| | | | Timothy G. Hannon, | |
| | | | Chief Financial Officer | |
