Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form

FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

or

For the quarterly period ended September 30, 2017
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-22405001-41092

pic1.jpg
Information Analysis Incorporated

WaveDancer, Inc.

(Exact name of registrant as specified in its charter)

  
Virginia

Delaware

54-1167364

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

12015 Lee Jackson Memorial Highway, Suite 210

Fairfax, Virginia

22033

(Address of principal executive offices)

(Zip Code)

11240 Waples Mill Road
Suite 201
Fairfax, Virginia 22030
(Address of principal executive offices, Zip Code)
(703) 383-3000
(Registrant’s

Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)
code: (703) 383-3000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

WAVD

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

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

Large accelerated filer

 

Accelerated filer ☐

Non-accelerated filer

 
Non-accelerated filer ☐

Smaller reporting company ☑

(Do not check if a smaller reporting company)

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑


As

Number of November 9, 2017, 11,201,760 shares outstanding by each class of common stock, as of November 7, 2023:

Common Stock, $0.001 par value $0.01 per share, of the registrant were outstanding.

– 2,013,180 shares outstanding

This document is also available through our website at http://ir.wavedancer.com/.



 

INFORMATION ANALYSIS INCORPORATED
FORM 10-Q
Index

 

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

FORM 10-Q

Table of Contents

 

Page

Number

PART I.FINANCIAL INFORMATIONNumber
Item 1.Financial Statements (unaudited except for the balance sheet as of December 31, 2016)
Balance Sheets as of September 30, 2017
and December 31, 20163
Statements of Operations for the three months
ended September 30, 2017 and 20164
Statements of Operations for the nine months
ended September 30, 2017 and 20165
Statements of Cash Flows for the nine months
ended September 30, 2017 and 20166
Notes to Financial Statements7
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations13
Item 4.Controls and Procedures17
PART II.OTHER INFORMATION 
   
Item 1.Legal ProceedingsUnaudited Condensed Consolidated Financial Statements18
   
Item 1A.Risk Factors

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

18

4

   

Condensed Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022

5

Condensed Consolidated Statements of Operations for the nine months ended September 30, 2023 and 2022

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022

7

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

20

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

27

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

1827
   

Item 3.

Defaults Upon Senior Securities

1827
   

Item 4.

Mine Safety Disclosures

1827
   

Item 5.

Other Information

1827
   

Item 6.

Exhibits

1828
   

SIGNATURES

2918

 

WaveDancer, Inc.

Form 10-Q September 30, 2023

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 
INFORMATION ANALYSIS INCORPORATED

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

  

September 30, 2023

  

December 31, 2022

 

ASSETS

        

Current assets

        

Cash and cash equivalents

 $877,198  $731,081 

Accounts receivable

  1,479,780   1,629,559 

Prepaid expenses and other current assets

  363,668   442,445 

Total current assets

  2,720,646   2,803,085 
         

Intangible assets, net of accumulated amortization of $440,400 and $308,217, respectively

  1,049,600   1,181,783 

Goodwill

  1,125,101   1,125,101 

Right-of-use operating lease asset

  279,132   376,104 

Property and equipment, net of accumulated depreciation and amortization of $423,916 and $391,628, respectively

  66,703   98,991 

Other assets

  20,623   79,305 

Assets held for sale

  -   2,316,845 

Total assets

 $5,261,805  $7,981,214 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Accounts payable

 $495,895  $573,789 

Revolving line of credit

  500,000   425,000 

Premium financing note payable

  94,071   - 

Accrued payroll and related liabilities

  604,079   676,796 

Commissions payable

  24,296   125,033 

Income taxes payable

  3,101   3,101 

Other accrued liabilities

  217,108   283,497 

Contract liabilities

  26,026   182,756 

Operating lease liabilities - current

  218,695   203,342 

Deferred acquisition consideration

  -   1,415,098 

Total current liabilities

  2,183,271   3,888,412 
         

Operating lease liabilities - non-current

  134,790   303,778 

Deferred tax liabilities, net

  59,121   59,121 

Total liabilities

  2,377,182   4,251,311 
         

Stockholders' equity

        

Common stock, $0.001 par value 100,000,000 shares authorized; 2,148,291 and 2,083,860 shares issued, 1,980,986 and 1,916,555 shares outstanding as of September 30, 2023 and December 31, 2022, respectively

  2,148   2,084 

Additional paid-in capital

  36,303,586   35,883,831 

Accumulated deficit

  (32,455,900)  (31,190,801)

Treasury stock, 167,305 shares at cost, as of September 30, 2023 and December 31, 2022

  (965,211)  (965,211)

Total stockholders' equity

  2,884,623   3,729,903 

Total liabilities and stockholders' equity

 $5,261,805  $7,981,214 
 
 
 September 30, 2017
 
 
 December 31, 2016
 
 
 
(Unaudited)
 
 
(see Note 1)
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $2,550,719 
 $1,895,372 
Accounts receivable, net
  1,809,200 
  1,157,387 
Prepaid expenses and other current assets
  493,523 
  663,556 
Notes receivable, current
  2,489 
  2,630 
Total current assets
  4,855,931 
  3,718,945 
 
    
    
Property and equipment, net
  13,528 
  27,198 
Other assets
  6,281 
  6,281 
Total assets
 $4,875,740 
 $3,752,424 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $958,289 
 $48,974 
Commissions payable
  757,672 
  853,340 
Other accrued liabilities
  635,183 
  396,081 
Deferred revenue
  449,466 
  615,035 
Accrued payroll and related liabilities
  268,607 
  206,475 
Total liabilities
  3,069,217 
  2,119,905 
 
    
    
Stockholders' equity:
    
    
Common stock, par value $0.01, 30,000,000 shares authorized;
    
    
12,844,376 shares issued, 11,201,760 shares outstanding as of September 30, 2017 and December 31, 2016
  128,443 
  128,443 
Additional paid-in capital
  14,637,980 
  14,631,362 
Accumulated deficit
  (12,029,689)
  (12,197,075)
Treasury stock, 1,642,616 shares at cost
  (930,211)
  (930,211)
Total stockholders' equity
  1,806,523 
  1,632,519 
Total liabilities and stockholders' equity
 $4,875,740 
 $3,752,424 
 
    
    
 
    
    

The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.

 

INFORMATION ANALYSIS INCORPORATED

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

Three Months Ended September 30,

 
  

2023

  

2022

 

Revenues

        

Professional fees

 $1,921,300  $2,114,012 

Software sales

  45,977   192,367 

Total revenues

  1,967,277   2,306,379 
         

Cost of revenues

        

Cost of professional fees

  1,268,820   1,467,065 

Cost of software sales

  48,645   100,718 

Total cost of revenues excluding depreciation and amortization

  1,317,465   1,567,783 
         

Gross profit

  649,812   738,596 
         

Selling, general and administrative expenses

  1,166,657   1,868,714 
         

Operating income (loss) from continuing operations

  (516,845)  (1,130,118)
         

Gain on sale of equity investment and settlement of contingent consideration receivable

  382,525   - 

Other income (expense), net

  3,113   3,188 

Interest expense

  (18,725)  (20,437)
         

Income (loss) from continuing operations before income taxes

  (149,932)  (1,147,367)
         

Provision for income taxes

  -   23,000 
         

Net income (loss) from continuing operations

  (149,932)  (1,170,367)
         

Loss from discontinued operations

  -   (3,530,152)
         

Net income (loss)

 $(149,932) $(4,700,519)
         

Basic and diluted loss per share from continuing operations

 $(0.08) $(0.64)

Basic and diluted loss per share from discontinued operations

  -   (1.92)

Basic and diluted net loss per share

 $(0.08) $(2.56)
         

Weighted average common shares outstanding

        

Basic and diluted

  1,939,790   1,838,213 
(Unaudited)
 
 
For the three months ended
 
 
 
September 30,
 
 
 
2017
 
 
2016
 
Revenues:
 
 
 
 
 
 
     Professional fees
 $1,385,257 
 $885,505 
     Software sales
  1,346,537 
  1,146,048 
          Total revenues
  2,731,794 
  2,031,553 
 
    
    
Cost of revenues:
    
    
     Cost of professional fees
  776,404 
  468,556 
     Cost of software sales
  1,319,499 
  1,006,912 
          Total cost of revenues
  2,095,903 
  1,475,468 
 
    
    
Gross profit
  635,891 
  556,085 
 
    
    
Selling, general and administrative expenses
  386,929 
  428,852 
Commissions expense
  140,963 
  187,030 
 
    
    
Income (loss) from operations
  107,999 
  (59,797)
 
    
    
Other income
  2,285 
  2,559 
 
    
    
Income (loss) before provision for income taxes
  110,284 
  (57,238)
 
    
    
Provision for income taxes
  - 
  - 
 
    
    
Net income (loss)
 $110,284 
 $(57,238)
 
    
    
 
    
    
Net income (loss) per common share:
    
    
   Basic
 $0.01 
 $(0.01)
   Diluted
 $0.01 
 $(0.01)
 
    
    
Weighted average common shares outstanding:
    
    
   Basic
  11,201,760 
  11,201,760 
   Diluted
  11,510,711 
  11,201,760 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.

5


INFORMATION ANALYSIS INCORPORATED

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Revenues

        

Professional fees

 $5,992,715  $6,458,534 

Software sales

  159,307   2,593,877 

Total revenues

  6,152,022   9,052,411 
         

Cost of revenues

        

Cost of professional fees

  3,979,059   4,283,365 

Cost of software sales

  161,340   2,430,139 

Total cost of revenues excluding depreciation and amortization

  4,140,399   6,713,504 
         

Gross profit

  2,011,623   2,338,907 
         

Selling, general and administrative expenses

  4,432,550   6,745,357 

Gain on litigation settlement

  (1,442,468)  - 
         

Operating loss from continuing operations

  (978,459)  (4,406,450)
         

Gain on sale of equity investment and settlement of contingent consideration receivable

  382,525   - 

Other income, net

  3,335   3,977 

Interest expense

  (90,982)  (59,574)
         

Loss from continuing operations before income taxes and equity in net loss of affiliate

  (683,581)  (4,462,047)
         

Provision for income taxes

  -   789,573 
         

Net loss from continuing operations before equity in net loss of affiliate

  (683,581)  (5,251,620)
         

Equity in net loss of affiliate

  (245,525)  - 
         

Net loss from continuing operations

  (929,106)  (5,251,620)
         

Income (loss) from discontinued operations

  (335,993)  (3,052,648)
         

Net loss

 $(1,265,099) $(8,304,268)
         

Basic and diluted loss per share from continuing operations

 $(0.48) $(2.97)

Basic and diluted loss per share from discontinued operations

 $(0.17) $(1.73)

Basic and diluted net loss per share

 $(0.65) $(4.70)
         

Weighted average common shares outstanding

        

Basic and diluted

  1,929,067   1,768,853 
(Unaudited)
 
 
For the nine months ended
 
 
 
September 30,
 
 
 
2017
 
 
2016
 
Revenues:
 
 
 
 
 
 
     Professional fees
 $3,676,730 
 $2,655,006 
     Software sales
  4,592,828 
  2,667,567 
          Total revenues
  8,269,558 
  5,322,573 
 
    
    
Cost of revenues:
    
    
     Cost of professional fees
  1,990,383 
  1,509,281 
     Cost of software sales
  4,506,099 
  2,373,788 
          Total cost of revenues
  6,496,482 
  3,883,069 
 
    
    
Gross profit
  1,773,076 
  1,439,504 
 
    
    
Selling, general and administrative expenses
  1,231,863 
  1,451,423 
Commissions expense
  380,267 
  408,695 
 
    
    
Income (loss) from operations
  160,946 
  (420,614)
 
    
    
Other income
  6,440 
  7,349 
 
    
    
Income (loss) before provision for income taxes
  167,386 
  (413,265)
 
    
    
Provision for income taxes
  - 
  - 
 
    
    
Net income (loss)
 $167,386 
 $(413,265)
 
    
    
 
    
    
Net income (loss) per common share:
    
    
   Basic
 $0.01 
 $(0.04)
   Diluted
 $0.01 
 $(0.04)
 
    
    
Weighted average common shares outstanding:
    
    
   Basic
  11,201,760 
  11,201,760 
   Diluted
  11,509,202 
  11,201,760 
 
    
    

The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.

 

INFORMATION ANALYSIS INCORPORATED

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Cash flows from operating activities

        

Net loss

 $(1,265,099) $(8,304,268)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Loss from discontinued operations

  335,993   3,052,648 

Depreciation and amortization

  164,471   165,770 

Stock-based compensation

  557,147   1,187,552 

Deferred income tax expense

  -   775,257 

Amortization of right-of-use assets

  96,972   136,441 

Accretion of deferred acquisition consideration

  27,370   59,467 

Gain on litigation settlement

  (1,442,468)  - 

Gain on sale of equity investment and settlement of contingent consideration receivable

  (382,525)  - 

Equity in loss of affiliate

  245,525   - 

Changes in operating assets and liabilities:

        

Accounts receivable

  149,779   132,688 

Prepaid expenses and other current assets

  61,925   84,842 

Other assets

  58,682   - 

Accounts payable

  (77,894)  (422,939)

Contract liabilities

  (156,730)  (149,149)

Accrued payroll and related liabilities and other accrued liabilities

  (139,106)  653,786 

Operating lease liability

  (153,635)  (142,420)

Commissions payable

  (100,737)  846 

Cash used in operating activities of continuing operations

  (2,020,330)  (2,769,479)

Cash used in operating activities of discontinued operations

  (693,106)  (2,330,754)

Net cash used in operating activities

  (2,713,436)  (5,100,233)
         

Cash flows from investing activities

        

Acquisition of property and equipment

  -   (234,060)

Proceeds from sale of equity investment and settlement of contingent consideration receivable

  1,400,000   - 

Proceeds from disposal of business

  935,974   - 

Net cash provided by (used in) investing activities

  2,335,974   (234,060)
         

Cash flows from financing activities

        

Borrowings under revolving line of credit

  575,000   - 

Repayments under revolving line of credit

  (500,000)  - 

Premium financing borrowings

  305,759   - 

Premium financing repayments

  (211,688)  - 

Proceeds from issuance of stock

  347,108   1,887,000 

Proceeds from exercise of stock options

  7,400   37,642 

Net cash provided by financing activities

  523,579   1,924,642 
         

Net increase (decrease) in cash and cash equivalents

  146,117   (3,409,651)
         

Cash and cash equivalents, beginning of period

  731,081   4,931,302 

Cash and cash equivalents, end of period

 $877,198  $1,521,651 
         

Supplemental cash flow Information

        

Interest paid

 $18,356  $1,002 

Non-cash investing and financing activities:

        

Non-cash proceeds on disposal of business

 $1,263,000  $- 

Value of common stock issued in connection with common stock purchase agreement

 $-  $112,500 
(Unaudited)
 
 
For the nine months ended
September 30,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
    Net income (loss)
 $167,386 
 $(413,265)
    Adjustments to reconcile net income (loss) to net cash
    
    
        provided by operating activities:
    
    
        Depreciation and amortization
  13,670 
  22,044 
        Stock-based compensation, net of forfeitures
  6,618 
  8,329 
        Bad debts
  - 
  13,781 
        Changes in operating assets and liabilities:
    
    
            Accounts receivable
  (651,813)
  (9,265)
            Prepaid expenses and other current assets
  170,033 
  105,775 
            Accounts payable, accrued payroll and related
    
    
               liabilities, and other accrued liabilities
  1,210,549 
  1,086,156 
            Deferred revenue
  (165,569)
  (117,248)
            Commissions payable
  (95,668)
  (51,528)
 
    
    
                Net cash provided by operating activities
  655,206 
  644,779 
 
    
    
Cash flows from investing activities:
    
    
    Acquisition of property and equipment
  - 
  (11,581)
    Increase in notes receivable - employees
  (2,500)
  (5,768)
    Payments received on notes receivable - employees
  2,641 
  2,179 
 
    
    
                Net cash provided by (used in) investing activities
  141 
  (15,170)
 
    
    
Net increase in cash and cash equivalents
  655,347 
  629,609 
 
    
    
Cash and cash equivalents, beginning of the period
  1,895,372 
  2,167,928 
 
    
    
Cash and cash equivalents, end of the period
 $2,550,719 
 $2,797,537 
 
    
    
Supplemental cash flow information
    
    
    Interest paid
 $- 
 $- 
    Income taxes paid
 $- 
 $- 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.

7

INFORMATION ANALYSIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS

 

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

  

Shares of

                     
  

Common

      

Additional

             
  

Stock

  

Common

  

Paid-In

  

Accumulated

  

Treasury

     
  

Issued

  

Stock

  

Capital

  

Deficit

  

Stock

  

Total

 

Balances at December 31, 2022

  2,083,860  $2,084  $35,883,831  $(31,190,801) $(965,211) $3,729,903 

Net loss

  -   -   -   (1,349,952)  -   (1,349,952)

Stock option compensation

  -   -   353,658   -   -   353,658 

Forfeiture of stock options on disposal of business (Note 2)

  -   -   (407,322)  -   -   (407,322)

Stock issued

  7,431   7   56,259   -   -   56,266 

Amortization of stock issue costs

  -   -   (18,635)  -   -   (18,635)

Issuance of stock from exercise of options

  2,000   2   7,398   -   -   7,400 

Balances at March 31, 2023

  2,093,291   2,093   35,875,189   (32,540,753)  (965,211)  2,371,318 

Net income

  -   -   -   234,785   -   234,785 

Stock option compensation

  -   -   88,159   -   -   88,159 

Amortization of stock issue costs

  -   -   (76,673)  -   -   (76,673)

Balances at June 30, 2023

  2,093,291   2,093   35,886,675   (32,305,968)  (965,211)  2,617,589 

Net loss

  -   -   -   (149,932)  -   (149,932)

Stock option compensation

  -   -   180,816   -   -   180,816 

Stock issued

  55,000   55   290,787   -   -   290,842 

Amortization of stock issue costs

  -   -   (54,692)  -   -   (54,692)

Balances at September 30, 2023

  2,148,291  $2,148  $36,303,586  $(32,455,900) $(965,211) $2,884,623 

  

Shares of

                     
  

Common

      

Additional

             
  

Stock

  

Common

  

Paid-In

  

Accumulated

  

Treasury

     
  

Issued

  

Stock

  

Capital

  

Deficit

  

Stock

  

Total

 

Balances at December 31, 2021

  1,888,231  $1,888  $31,806,458  $(13,436,963) $(930,211) $17,441,172 

Net loss

  -   -   -   (2,078,307)  -   (2,078,307)

Stock option compensation

  -   -   312,176   -   -   312,176 

Issuance of stock from exercise of options

  10,500   11   26,788   -   -   26,799 

Balances at March 31, 2022

  1,898,731   1,899   32,145,422   (15,515,270)  (930,211)  15,701,840 

Net loss

  -   -   -   (1,525,442)  -   (1,525,442)

Stock option compensation

  -   -   529,565   -   -   529,565 

Issuance of stock from exercise of options

  5,200   5   8,387   -   -   8,392 

Balances at June 30, 2022

  1,903,931   1,904   32,683,374   (17,040,712)  (930,211)  14,714,355 

Net loss

  -   -   -   (4,700,519)  -   (4,700,519)

Stock option compensation

  -   -   614,094   -   -   614,094 

Stock issued

  166,300   166   1,999,334   -   -   1,999,500 

Issuance of stock from exercise of options

  10,700   11   37,440   -   (35,000)  2,451 

Balances at September 30, 2022

  2,080,931  $2,081  $35,334,242  $(21,741,231) $(965,211) $12,629,881 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Summary of Significant Accounting Policies

Organization and Business

Founded in 1979 as Information Analysis Incorporated (the(“IAI”), IAI changed its name to WaveDancer, Inc. (“WaveDancer” or the “Company”), and converted from a Virginia corporation to which we sometimes refer as IAI,a Delaware corporation in December 2021. The Company is in the business of developing and maintaining information technology (IT)(“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations. We presently concentrate our technology, services and experience to developing web-based and mobile device solutions (including electronic forms conversions), data analytics, cyber security applications, and legacy software migration and modernization for various agencies

On March 17, 2023, the Company sold effectively 75.1% of the federal government.equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). Subsequent to the sale, the Company discontinued consolidating GMI and the 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 these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations. See Note 2 for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation.

Prior to March 17, 2023, we had two operating segments: Tellenger and Blockchain SCM. Given the classification of GMI, which comprised all of the material operations of the Blockchain SCM segment, as a discontinued operation (see Note 2). After March 17, 2023, the Company manages its business as one reportable operating segment.

Liquidity and Going Concern

During the nine months ended September 30, 2023, the Company generated an operating loss from continuing operations of $978,459. As of September 30, 2023, the Company had working capital of $537,375 including cash and cash equivalents of $877,198. We estimate that over the twelve months from the date of these financial statements our operating activities may use as much as $1.0 million to $1.5 million of cash. On August 2, 2023, the Company realized $118,655 of cash proceeds from the sale of 20,000 shares of common stock, and on August 9, 2023, the Company received $1,400,000 of cash from the sale of its remaining equity interest in GMDC and its contingent consideration receivable from GMDC. On August 9, 2023, the Company repaid $500,000 on the Summit line of credit and has no further borrowing capacity thereunder. On September 29, 2023, the Company issued 35,000 shares of its common stock to its chairman and CEO for $175,000 of cash. The transaction was approved by the board of directors and was at a premium to the trading price on the date of the transaction. We estimate that within twelve months from the issuance of these financial statements, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements as well as to grow its business either organically or through acquisitions. The Company is evaluating strategic alternatives which include the potential merger or sale of the Company. There is no assurance that such activities will result in any transactions or provide software and servicesadditional capital. Accordingly, there is substantial doubt about the Company’s ability to government and commercial customers throughoutcontinue as a going concern for at least one year from the United States, with a concentration indate that the Washington, D.C. metropolitan area.

Unaudited Interim Financial Statements
accompanying unaudited condensed consolidated financial statements are issued.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Reverse Stock Split

On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $0.001 per share, (the “Common Stock”) at a ratio of one-for-ten (the “Reverse Stock Split”). The Reverse Stock split affected all issued common stock and options and warrants to acquire common stock. No fractional shares were issued as a result of the reverse split and any fractional share otherwise issuable were rounded up to the nearest whole number. All shares and per share amounts in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split. Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834 pre-split shares to approximately 1,980,983 post-split shares, before finalizing the rounding of fractional shares. As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten. 

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q10-Q and Article 8-038-03 of Regulation S-X.S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). for interim financial statements. In the opinion of management, the unaudited financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with ourthe Company’s audited financial statements for the year ended December 31, 20162022 included in the Annual Report on Form 10-K10-K filed by the Company with the SEC on March 31, 2017 (theApril 17, 2023 (the “Annual Report”)., as amended. The accompanying December 31, 20162022 condensed consolidated balance sheet and financial information was derived from ourthe audited financial statements included in the Annual Report.Report but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

9

WaveDancer, Inc.

Form 10-Q September 30, 2023

The unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023 include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we” or “our”). All significant intercompany transactions and balances have been eliminated in consolidation.

Other than as discussed in “Equity Method Investments” below, there have been no changes in the Company’s significant accounting policies as of September 30, 20172023, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-KReport.

Equity Method Investments

The Company accounts for investments in which it owns between 20% to 50% of the fiscal year ended December 31, 2016 that was filedcommon stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures (“ASC 323”). Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The Company reflects its share of gains and losses from the investment in equity in net loss of affiliate in the unaudited condensed consolidated statements of operations using the most recently available earnings data at the end of the period.

In connection with the SECsale of GMI to GMDC on March 31, 2017.

17, 2023, (the "Sale Date"), the Company received common stock in GMDC representing approximately 24.9% of the equity of GMDC. See Note 2 for further information about the sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation. The Company accounted for its investment in GMDC in accordance with the equity method from March 17, 2023 through August 9, 2023. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. As of September 30, 2023 the Company has no equity investment in GMDC and any other equity exposure to the GMI business.

Use of Estimates and Assumptions

The preparation

Preparation of condensed consolidated financial statements in accordanceconformity with GAAP requires managementus to make estimates and assumptions that affect certainthe amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofdisclosed in the financial statements and the reported amountsaccompanying notes. Actual results could differ materially from these estimates due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; fair values of financial instruments, intangible assets, and goodwill, including the underlying estimates of cash flows of our products and reporting unit; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, and the valuation of deferred tax assets and liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, and the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Concentration of Credit Risk

During the three months ended September 30, 2023, the Company’s prime contracts with U.S. government agencies represented 8.3% of revenue and expensessubcontracts under federal procurements represented 90.6% of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 29.3%, 19.9%, and 18.6% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 56.6% of the Company’s revenue in aggregate.

During the three months ended September 30, 2022, the Company’s prime contracts with U.S. government agencies represented 11.4% of revenue and subcontracts under federal procurements represented 82.8% of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 30.9%, 21.3%, and 13.0% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 49.9% of the Company’s revenue in aggregate.

During the nine months ended September 30, 2023, the Company’s prime contracts with U.S. government agencies represented 9.1% of revenue and subcontracts under federal procurements represented 89.3% of revenue. The terms of these subcontracts vary from one to five years. Three subcontracts under federal procurements represented 30.3%, 21.1%, and 16.6% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 54.5% of the Company’s revenue in aggregate.

During the nine months ended September 30, 2022, the Company’s prime contracts with U.S. government agencies represented 28.6% of revenue and subcontracts under federal procurements represented 67.8% of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 27.4%, 16.5%, and 10.5% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 41.4% of the Company’s revenue in aggregate.

10

WaveDancer, Inc.

Form 10-Q September 30, 2023

The Company sold third-party software and maintenance contracts under agreements with one major supplier, accounting for 9.7% and 11.8% of total revenue during the reporting period. Actual results can,three- and in many cases will, differ from those estimates. 

Income Taxes
nine-months ended September 30, 2022, respectively.

As of September 30, 2017, there have been no material changes2023, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 42.2% and 17.2% of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts represented 69.8% of the Company’s outstanding accounts receivable in aggregate.

As of September 30, 2022, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 46.5% and 13.6% of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts represented 66.8% of the Company’s outstanding accounts receivable in aggregate.

Note 2.Sale and Deconsolidation of GMI and Discontinued Operations

On March 17, 2023, the Company entered in and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC, a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc. In exchange for this sale, the Company received common shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred stock referenced below, 24.9% interest in the purchaser, cash consideration of $935,974 and contingent annual payments equal to five percent (5%) of the purchaser’s GAAP based revenue through December 31, 2029 attributable to the Company’s uncertain tax position disclosures as provided in Note 7 purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. Payments will be calculated for each calendar year and are due by March 31 of the Annual Report.following year. GMDC also paid the Company $133,148 for certain of GMI’s operating expenses for the period beginning March 1, 2023 through March 17, 2023.

The equity interest StealthPoint and other GMDC investors received is in the form of Series A non-participating convertible preferred stock having a one-times (1x) liquidation preference and no cumulative dividends. In addition, the Company and GMDC entered into a transition services agreement whereby the Company continues to provide certain administrative services for GMI. The value of these services is estimated to be $65,000 which was paid by GMDC at closing and is not subject to adjustment. The $65,000 prepayment is included in other accrued liabilities on the unaudited condensed consolidated balance sheet as of March 31, 2023 and has been amortized as a reduction to selling, general and administrative expenses ratably over the three-month period ending June 30, 2023 after which time no further transition services were provided. The total cash received at closing was $1,000,974. The Company does not anticipate that total unrecognized tax benefits will significantly change prioralso has the right to appoint a representative to GMDC’s board of directors and a right to co-invest in the anticipated Series B preferred stock financing round which GMDC intends to consummate in the future. The Company recognized a gain on the sale of GMI of $100,615 in the first quarter of 2023, which was 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 components of the consideration received and the methods for determining their fair values as of March 17, 2023 were as follows:

Consideration

 

Amount

 

Description and Valuation Methodology

Cash at closing

 $935,974 

Cash received at closing less estimated value of transition services to be provided.

Cash after closing

  133,148 

Actual cash operating expenses of GMI from March 1 through March 17, 2023 (prior to the transfer of GMI to GMDC).

GMDC common stock

  581,000 

Based on Series A preferred stock issuance to other GMDC investors for $3,000,000 in cash and application of an option pricing model backsolve method and a minority interest discount to estimate the fair value of the common shares of GMDC.

Contingent payments

  682,000 

Estimated by applying a discount rate of 40.8% to the projected cash receipts expected over the 7-year horizon. (See Note 5).

Total consideration

 $2,332,122  

The GMDC common stock was accounted for as an equity method investment from March 17, 2023 and through its sale on August 9, 2023. During this period, a net loss of $245,525 in the equity investment was recorded. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. The contingent consideration receivable of $682,000 was settled in cash for $1,000,000 and a gain of $318,000 was recognized during the three months ended September 30, 2018.2023 (see Note 5).

11

WaveDancer, Inc.

Form 10-Q September 30, 2023

The following table sets forth details of net earnings from discontinued operations for the nine months ended September 30, 2023 and 2022, which reflects the results of the Blockchain SCM operating segment through the date our controlling financial interest in it was sold – March 17, 2023 (See Note 1).

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Revenue

 $-  $-  $-  $566,862 

Cost of revenue

  -   256,974   74,223   1,118,301 

Excess of contract costs over revenue

  -   (256,974)  (74,223)  (551,439)

Operating expenses -

                

Salaries and benefits

  -   463,502   484,249   1,076,781 

Intangibles amortization

  -   303,791   85,338   917,496 

Stock based compensation, before forfeitures

  -   215,775   65,487   268,283 

Forfeiture of stock options

  -   -   (407,322)  - 

Other operating expenses

  -   113,078   134,633   702,534 

Change in fair value of contingent consideration

  -   -   -   (930,000)

Goodwill impairment

  -   2,254,624      2,254,624 

Gain on disposal of business

  -   -   (100,615)  - 

Loss before income tax benefit

  -   (3,607,744)  (335,993)  (4,841,157)

Income tax benefit

  -   77,592   -   1,788,509 

Net loss on discontinued operations

 $-  $(3,530,152) $(335,993) $(3,052,648)

During the nine months ended September 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 Recognition

The Company earnsfrom 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.

12

WaveDancer, Inc.

Form 10-Q September 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 September 30,

 
  

2023

  

2022

 

Contract Type

 

Amount

  

Percentage

  

Amount

  

Percentage

 

Services time & materials

 $1,714,509   87.2% $1,896,829   82.2%

Services fixed price over time

  102,402   5.2%  58,965   2.6%

Services combination

  33,090   1.7%  50,440   2.2%

Services fixed price per unit

  71,299   3.6%  107,778   4.7%

Third-party software

  45,977   2.3%  59,076   2.6%

Software support & maintenance

  -   0.0%  44,804   1.9%

Incentive payments

  -   0.0%  88,487   3.8%

Total revenue

 $1,967,277   100.0% $2,306,379   100.0%

13

WaveDancer, Inc.

Form 10-Q September 30, 2023

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Contract Type

 

Amount

  

Percentage

  

Amount

  

Percentage

 

Services time & materials

 $5,314,845   86.4% $5,963,361   65.9%

Services fixed price over time

  307,206   5.0%  161,273   1.8%

Services combination

  99,270   1.6%  80,520   0.9%

Services fixed price per unit

  271,394   4.4%  253,379   2.8%

Third-party software

  159,307   2.6%  2,345,884   25.9%

Software support & maintenance

  -   0.0%  142,891   1.6%

Incentive payments

  -   0.0%  105,103   1.1%

Total revenue

 $6,152,022   100.0% $9,052,411   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 September 30, 2023 and December 31, 2022.

Accounts receivable as of September 30, 2023 and December 31, 2022, consist of the following: 1)

  

September 30, 2023

  

December 31, 2022

 

Billed federal government

 $1,456,519  $1,573,407 

Billed commercial and local government

  22,000   56,152 

Unbilled receivables

  1,261   - 

Accounts receivable

 $1,479,780  $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 are not obligatedas follows:

Balance at December 31, 2022

 $182,756 

Contract liabilities added

  - 

Revenue recognized

  (55,665)

Balance at March 31, 2023

  127,091 

Contract liabilities added

  - 

Revenue recognized

  (55,088)

Balance at June 30, 2023

  72,003 

Contract liabilities added

  - 

Revenue recognized

  (45,977)

Balance at September 30, 2023

 $26,026 

Balance at December 31, 2021

 $186,835 

Contract liabilities added

  19,280 

Revenue recognized

  (56,423)

Balance at March 31, 2022

  149,692 

Contract liabilities added

  87,612 

Revenue recognized

  (71,461)

Balance as of June 30, 2022

  165,843 

Contract liabilities added

  2,491 

Revenue recognized

  (130,648)

Balance at September 30, 2022

 $37,686 

Revenues recognized during the three months ended September 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $45,977 and $48,708, respectively. Revenues recognized during the nine months ended September 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $156,730 and $160,809, respectively.

14

WaveDancer, Inc.

Form 10-Q September 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 September 30, 2023, and December 31, 2022 the Company had $0 of deferred costs of revenue. Changes in deferred costs of revenue balances for the nine months ended September 30, 2022, are as follows:

Balance at December 31, 2021

 $154,218 

Deferred costs added

  2,800 

Deferred costs expensed

  (55,362)

Balance at March 31, 2022

  101,656 

Deferred costs expensed

  (53,434)

Balance as of June 30, 2022

  48,222 

Deferred costs expensed

  (48,222)

Balance as of September 30, 2022

 $- 

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 September 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 September 30, 2023, our two operating leases had a weighted average remaining lease term of 28 months and a weighted average discount rate of 5.1%. Future lease payments under operating leases as of September 30, 2023, were as follows:

2023

  58,041 

2024

  174,721 

2025

  74,804 

2026

  70,220 

Total lease payments

  377,786 

Less: discount

  (24,301)

Present value of lease liabilities

 $353,485 

The total expense incurred related to its operating leases was $38,053 and $53,560 for the three months ended September 30, 2023 and 2022, respectively, and $118,567 and $164,281 for the nine months ended September 30, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

15

WaveDancer, Inc.

Form 10-Q September 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"),September 30, 2023 and (4) allocateDecember 31, 2022:

  

September 30, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 

Cash equivalents:

                

Money market funds

 $809,997  $-  $-  $809,997 

  

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 contractualafter-tax payments based on discount rate that reflects the risk of achieving the timing and amounts of forecasted payments. The significant 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. On August 9, 2023, the Company and GMDC agreed to terminate all rights and obligations 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 flows. by GMDC to the Company, resulting in a gain of $318,000.

The Company does not currently have any other material lease obligations.

In August 2016,following table is a roll-forward of the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” to provide additional guidance and reduce diversityLevel 3 fair value measurements, which are not considered financial instruments.

Fair value of contingent consideration:

December 31, 2022

$-

Additions

682,000

March 31, 2023

682,000

Additions

-

June 30, 2023

682,000

Settlements

(682,000)

September 30, 2023

$-

There were no unrealized gains or losses recognized in practice in how certain cash receipts and cash payments are presented and classified inincome for 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 three- or nine months-month periods ended September 30, 2017,2023.

16

WaveDancer, Inc.

Form 10-Q September 30, 2023

Note 6.Intangible Assets and Goodwill

Information regarding our intangible assets is as follows:

  

Weighted Average Useful Life (Years)

  

Balance December 31, 2022

  

Additions

  

Balance September 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)  (132,183)  (440,400)

Sub-total

      901,783   (132,183)  769,600 

Intangible assets with indefinite lives

                

Trade names

  

Indefinite

   280,000   -   280,000 

Net identifiable intangible assets

     $1,181,783  $(132,183) $1,049,600 

  

Weighted Average Useful Life (Years)

  

Balance December 31, 2021

  

Additions

  

Balance September 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)  (132,183)  (264,156)

Sub-total

      1,078,027   (132,183)  945,844 

Intangible assets with indefinite lives

                

Trade names

  

Indefinite

   280,000   -   280,000 

Net identifiable intangible assets

     $1,358,027  $(132,183) $1,225,844 

As of September 30, 2023, expected amortization expense relating to purchased intangible assets for each of the Company had two shareholder–approvednext five years and thereafter is as follows:

2023

 $44,061 

2024

  146,307 

2025

  136,248 

2026

  136,248 

2027

  136,248 

Thereafter

  170,488 

Total

 $769,600 

Note 7.Stock-Based Compensation

We have three 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.

17

WaveDancer, Inc.

Form 10-Q September 30, 2023

The 2016 Plan became effective June 1, 2016,Company recognizes compensation costs on a straight-line basis over the service period of the awards. There were no option awards granted in the three and expires April 4, 2026. The 2016 Plan provides for the granting 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 threenine 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 ended 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. There were 1,071,000 and 1,193,500 unexpired options remaining from the 2006 Plan at September 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 fair2023. Fair values of option awards granted in the three months and nine months ended September 30, 2017 and 2016,2022, were estimated using the Black-Scholes option pricing model usingunder the following assumptions:
   
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 yearsn/a 5 years2-10 years
Expected volatility  44.6%n/a 44.6%34.9% - 50.4%
A summary

Three MonthsNine Months

Risk-free interest rate

2.85% - 2.90%1.91% - 2.90%

Dividend yield

0%0%

Expected term (years)

3.25 - 6.003.25 - 6.00

Expected volatility

45.9% - 48.1%45.8% - 48.5%

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
 

 
Shares
 
 

Weighted-Average
Exercise Price
 
 
Weighted-Average
Remaining
Contractual Term
 
 
Aggregate
Intrinsic
Value
 
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 217,00053,500 options with grant date fair values totaling $168,900, and 131,200 options with grant date fair values totaling $1,639,870, granted during the three months and nine months ended September 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, respectively. There were nozero and 10,700 options exercised during the ninethree months ended September 30, 2017 2023 and 2016.2022, respectively. There were 2,000 and 26,400 options exercised during the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2017,2023, there was $15,009$431,067 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 four11 months.

Total compensation expense related to these plans was $6,908$180,816 and $2,857$398,319 for the quartersthree months ended September 30, 2017 2023 and 2016,2022, respectively, none of which related to options awarded to non-employees. Total compensation expense related to these plans was $7,230 and $8,329$557,146 and $971,777 for the nine months ended September 30, 2017 2023 and 2016,2022, respectively, noneand 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 relatedhe 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 options awarded to non-employees. Compensation expense relating to prior periodsrelease from escrow 43,648 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 43,648 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 in the amountsecond quarter of $612 was reversed in the nine months ended 2023.

Note 9.Revolving Line of Credit and Notes Payable

On September 30, 2017, from options that were forfeited prior to vesting, and are not included in 2022, 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:
 
 
Shares
 
 
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 expiresof credit are secured by the assets of the Company. There were no borrowings and $500,000 of repayments during the three months ended September 30, 2023, and there were $575,000 of borrowings and $500,000 of repayments during the nine months ended September 30, 2023. This line of credit expired on May 31, 2018.August 16, 2023.

On September 11, 2023, the Company and Summit entered a new line of credit agreement with the same terms as the preceding agreement, except that the maximum availability under the new line was reduced from $1,000,000 to $500,000. As of September 30, 2017,2023, there was $500,000 outstanding and no amounts were outstandingborrowing availability under this line of credit. The Company did not borrow against this line of credit expires on January 16, 2024.

18

WaveDancer, Inc.

Form 10-Q September 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 450,000 shares of Common Stock that the Company may issue or elect, in the last twelve months.

Company’s sole discretion, to issue and sell to B. Riley, from time to time under the Purchase Agreement.

On August 11, 2022 and November 10, 2022, the Company issued to B. Riley 8,984 and 2,995 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 nine months ended September 30, 2023, the Company amortized $54,692 and $150,000 of the commitment fee, respectively.

During the three months ended September 30, 2023, the Company sold 20,000 shares of common stock under the ELOC at an average price of $5.90 per share, net of fees of $0.30 per share. The net proceeds from this sale were $118,655. During the nine months ended September 30, 2023, the Company sold 27,429 shares of common stock under the ELOC at an average price of $6.30 per share, net of fees of approximately $0.30 per share. The net proceeds from these sales were $172,108. There were no sales under the Purchase Agreement during the three and nine months ended September 30, 2022.

 

Note 11.Income Taxes

For the three and nine months ended September 30, 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 against all deferred tax assets.

 
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 effecteffects of 52,655 shares and 26,77423,104 shares from stock options and zero shares from warrants, and 29,456 shares from stock options and zero shares from warrants, were excluded from diluted shares for the three and nine months and nine months, respectively, ended September 30, 2016.2022, respectively. The antidilutive effects of 43,735 shares from stock options and zero shares from warrants, and 57,009 shares from stock options and 15,000 shares from warrants, were excluded from diluted shares for the three and nine months ended September 30, 2022, respectively.

WaveDancer, Inc.

Form 10-Q September 30, 2023

 
The following is a reconciliation of the amounts used in calculating basic and diluted net income (loss) per common share:
 
 
Net income (loss)
 
 
Shares
 
 
Per Share Amount
 
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)

6.            
Financial Instruments
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.
● 
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.
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.

20

WaveDancer, Inc.

Form 10-Q September 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% was initially 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. On August 9, 2023, the Company sold its remaining 24.9% interest in GMI to GMDC. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. As of September 30, 2023 the Company has no equity method investment in GMDC and any other equity exposure to the GMI business.

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 implementationkey performance indicators.

WaveDancer, Inc.

Form 10-Q September 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 are focused on bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.

As discussed below under ‘Liquidity and Capital Resources’, the three months ended September 30, 2017, our prime contracts with U.S. government agencies generated 67.4%Company will need to raise additional capital to grow its business either organically or through acquisition. We are actively pursuing strategic alternatives which include the potential merger or sale of our revenue, subcontracts under federal procurements generated 27.7%the Company. Any such transaction, if consummated, could fundamentally alter the Company’s business.

Results of our 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, one software sale generated 23.9% of our revenue and one other contract generated 12.0% of our revenue. One subcontract generated 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 the three months ended September 30, 2016, our prime contracts with U.S. government agencies generated 77.2% of our revenue, subcontracts under federal procurements generated 9.2% of our revenue, and 13.6% of our revenue came from commercial contracts. The terms of these contracts and subcontracts varied from single transactions to five years. Within this group of prime contracts with U.S. government agencies, three contracts generated 16.2%, 10.4%, and 9.3% of our revenue, respectively.
In the nine months ended September 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, and 13.7% of our revenue came from commercial contracts. The terms of these contracts and subcontracts varied 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 revenue in the third 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.
Continuing Operations Three Months Ended September 30, 2017 versus Three Months Ended September 30, 2016
2023 and 2022

Revenue

Our revenues in the third quarter of 2017 were $2,731,794 compared to $2,031,553 in the corresponding quarter in 2016, an increase of $700,241, or 34.5%. Professional fee

Total revenue was $1,385,257 in the third quarter of 2017 versus $885,505 in the corresponding quarter in 2016, an increase of $499,752, or 56.4%, and software revenue was $1,346,537 in the third quarter of 2017 versus $1,146,048 in the third quarter of 2016, an increase of $200,489, or 17.5%. 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. Software sales and associated margins are subject 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 costs due to a redefinition of “control” of the software product in the course 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 fee revenue, and gross profit 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, exclusive of sales commissions, were $386,929, or 14.2% of revenues, in the third quarter of 2017 versus $428,852, or 21.1% of revenues, in the third quarter of 2016. These expenses decreased $41,923, or 9.8%, from 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$1,967,277 for the three months ended September 30, 2017,2023, compared with $2,306,379 in the prior year quarter, a decrease of $339,102, or 14.7%. The decrease in revenue was $110,284,driven by our de-emphasis of third-party software sales which accounted for just 2.3% of our sales in the third quarter of 2023 as compared to 8.3% in the prior year quarter. Professional services revenue decreased by $192,712, or 4.0%9.1%, to $1,921,300 in the third quarter of 2023 from $2,114,012 in the third quarter of 2022. The decline in professional services revenue is driven primarily by one software modernization project where we had fewer resources deployed in the third quarter of 2023 as compared to the comparable prior year quarter based on current project deliverables.

Gross Profit

Gross profit decreased by $88,784 or 12.0%, to $649,812 for the three months ended September 30, 2023 as compared to $738,596 in the prior year quarter. The decrease in gross profit includes an increase from professional services of $5,533 and a decrease from third-party software sales of $94,317. Professional services gross profit as a percent of revenue versus netdeclined from 37.5% to 35.8% due to a change in the mix of contracts generating revenue and the related billing rates resulting as well as increases in our costs of labor that outpaced billing rate increases.

Selling, General and Administrative Expenses

The following table shows the major elements of SG&A expenses for the three months ended September 30, 2023 and 2022 and the changes between periods:

  

2023

  

2022

  

Increase/ (Decrease)

 

Salaries and benefits

 $500,301  $611,053  $(110,752)

Stock based compensation

  180,816   398,319   (217,503)

Legal and professional fees

  84,671   444,547   (359,876)

Depreciation & Amortization

  56,644   53,597   3,047 

Acquisition costs

  68,457   38,617   29,840 

Software, IT and office expenses

  88,349   78,812   9,537 

Governance and investor relations

  38,901   97,800   (58,899)

Insurance

  89,338   81,979   7,359 

Marketing and promotions

  460   29,629   (29,169)

All other

  58,720   34,361   24,359 

Total SG&A

 $1,166,657  $1,868,714  $(702,057)

Operating Income from Continuing Operations

Our operating loss from continuing operations was $516,845 in the third quarter of 2023 as compared to a loss of $57,238,$1,130,118 in the corresponding quarter in 2022, an improvement of $613,273, or (2.8%)54.3%. The decrease in the operating loss from continuing operations is primarily the result of revenue, for the same perioddecrease in 2016.SG&A expenses of $702,057, as shown above, partially offset by the decrease in gross profit of $88,784.

22

WaveDancer, Inc.

Form 10-Q September 30, 2023

Results of Discontinued Operations Three Months Ended September 30, 2017 versus2023 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 third quarter of 2023. Following is the detail of discontinued operations for the third quarter of 2022:

  

2022

 

Revenue

 $- 

Cost of revenue

  256,974 

Gross profit

  (256,974)

Operating expenses -

    

Salaries and benefits

  463,502 

Depreciation and amortization

  303,791 

Stock based compensation

  215,775 

Other operating expenses

  113,078 

Goodwill impairment

  2,254,624 

Loss before income tax benefit

  (3,607,744)

Income tax benefit

  77,592 

Net income on discontinued operations

 $(3,530,152)

Results of Continuing Operations Nine monthsMonths Ended September 30, 2016

2023 and 2022

Revenue

Our revenues in

Total revenue was $6,152,022 for the first nine months of 2017 were $8,269,558ended September 30, 2023, compared to $5,322,573with $9,052,411 in the corresponding nine-monthprior year period, in 2016, an increasea decrease of $2,946,985,$2,900,389, or 55.4%32.0%. Professional feeThe decrease in revenue was $3,676,730driven primarily by our de-emphasis of third-party software sales which accounted for just 2.6% of our sales in the first nine months of 2017 versus $2,655,006ended September 30, 2023, as compared to 28.7% in the nine months ended September 30, 2022. Professional services revenue decreased by $465,819 to $5,992,715 for the nine months ended September 30, 2023, from $6,458,534 in the corresponding nine months of 2022. The decline in 2016, an increase of $1,021,724, or 38.5%,professional services revenue arose after the first quarter and is driven primarily by one software revenue was $4,592,828modernization project where we had fewer resources deployed in the firstsecond and third quarters of 2023 as compared to the comparable prior year quarters based on current project deliverables.

Gross Profit

Gross profit decreased by $327,284 or 14.0%, to $2,011,623 for the nine months of 2017 versus $2,667,567ended September 30, 2023, as compared to $2,338,907 in the firstprior year. The decrease in gross profit includes a decrease from professional services of $161,513 and from third-party software sales of $165,771. Professional services gross profit as a percent of revenue declined slightly from 33.7% to 33.6% due primary to changes in the mix of contracts generating revenue and the related billing rates.

WaveDancer, Inc.

Form 10-Q September 30, 2023

Selling, General and Administrative Expenses

The following table shows the major elements of SG&A expenses for the nine months ended September 30, 2023 and 2022 and the changes between periods:

  

2023

  

2022

  

Increase/ (Decrease)

 

Salaries and benefits

 $1,595,216  $2,022,252  $(427,036)

Stock based compensation

  557,146   971,777   (414,631)

Legal and professional fees

  672,582   1,467,736   (795,154)

Depreciation & Amortization

  164,472   165,977   (1,505)

Acquisition costs

  512,975   829,478   (316,503)

Software, IT and office expenses

  267,693   327,210   (59,517)

Governance and investor relations

  246,439   376,904   (130,465)

Insurance

  253,384   188,931   64,453 

Marketing and promotions

  1,328   102,996   (101,668)

All other

  161,315   292,096   (130,781)

Total SG&A

 $4,432,550  $6,745,357  $(2,312,807)

Operating Loss from Continuing Operations

Our operating loss from continuing operations was $978,459 for nine months ended September 30, 2023 as compared to $4,406,450 for the comparable prior year period, a decrease in the loss of 2016, an increase$3,427,991 or 77.8%. The decrease in the operating loss from continuing operations is primarily the result of $1,925,261, or 72.2%the gain on litigation settlement of $1,442,468 along with the decrease in SG&A expenses of $2,312,807, as shown above, partially offset by the decrease in gross profit of $327,284.

Results of Discontinued Operations  Nine Months Ended September 30, 2023 and 2022

The sale of GMI to GMDC occurred on March 17, 2023, and as a result we had approximately two fewer weeks of costs and expenses for GMI for the first quarter of 2023 as compared to the first quarter of 2022, and no activity for the second and third quarters of 2023 as compared to full activity during the second and third quarters of 2022, as follows:

          

Increase/

 
  

2023

  

2022

  

(Decrease)

 

Revenue

 $-  $566,862  $(566,862)

Cost revenue

  74,223   1,118,301   (1,044,078)

Gross profit

  (74,223)  (551,439)  477,216 

Operating expenses -

            

Salaries and benefits

  484,249   1,076,781   (592,532)

Depreciation and amortization

  85,338   917,496   (832,158)

Stock based compensation, before forfeitures

  65,487   268,283   (202,796)

Forfeiture of stock options

  (407,322)  -   (407,322)

Other operating expenses

  134,633   702,534   (567,901)

Change in fair value of contingent consideration

  -   (930,000)  930,000 

Goodwill impairment

  -   2,254,624   (2,254,624)

Gain on disposal of business

  (100,615)  -   (100,615)

Loss before income tax benefit

  (335,993)  (4,841,157)  4,505,164 

Income tax benefit

  -   1,788,509   (1,788,509)

Net income (loss) on discontinued operations

 $(335,993) $(3,052,648) $2,716,655 

Critical Accounting Estimates

Our accounting policies are described in Note 1 of our consolidated financial statements – Organization and Summary of Significant Accounting Policies. RevenueOur 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 professional fees increased due primarilyour 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 September 30, 2023

There have been no material changes 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 increasecritical accounting estimates as compared to the critical accounting estimates discussed in our software revenueAnnual 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 2017 versus the same period in 2016 is dueNotes 2 and 5 to the non-recurring natureaccompanying consolidated financial statements, and

2) the determination of manythe initial fair value of our software sales transactions. One software sales transaction accounted for $1,686,952equity method investment in GMDC as of March 17, 2023.

The determination of the increase. Software salesfair value of the contingent consideration is a recurring fair value measure at the end of each reporting period and associated margins are subject to considerable fluctuation from period to period, basedincludes significant judgmental inputs not observable in the market. Significant judgment was employed in determining the assumptions used in the determination of fair value as of March 31, 2023 and, accordingly, changes in assumptions could have a material impact on the product mix soldincrease or decrease in the fair value of contingent consideration recorded in any given period.

Equity Method Investment in GMDC

The Company received 993,768 common shares of GMDC representing 19.0 percent of the fully diluted capitalization. Prior to closing the acquisition on March 17 and referral fees earned.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 revenue recognizedSeries 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 same volumetotal equity value that results in a value of software sales activity would be significantly less in 2018Series A equal to its issuance price, and beyond uponto estimate the adoptionfair value 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 productcommon shares. The significant inputs utilized in the courseOPM Backsolve include an estimated time to exit of four years, an estimated volatility of 75.0 percent, and a risk-free rate of 4.29 percent. A minority interest discount of 23.5% was also applied.

Liquidity and Capital Resources

On September 30, 2023, the software sales transactions.

Gross Profit
Gross profit was $1,773,076, or 21.4%Company had a net working capital of revenue in the first nine months$537,375, including cash and cash equivalents of 2017 versus $1,439,504, or 27.0%$877,198 and $500,000 outstanding under its line of revenue in the first nine months of 2016.credit with Summit bank. For the nine months ended September 30, 2017, $1,686,3472023, we generated a net loss from continuing operations of $929,106. As discussed below, our ability to generate sufficient cash flows to meet our obligations for the twelve months following the issuance of these financial statements is dependent upon factors which are sufficiently outside of management’s control. Accordingly, there is 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 gross profit was attributableCompany. 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 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% of software sales. Gross profit from professional fees increased with the increase in revenue, and increasedcontinue as a percentage of sales due to the timing of revenue recognition versus the accumulation of direct costs 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 dollars and as a percentage of sales due to a decrease in referral feesgoing concern for facilitating third-party sales, for which there were no direct costs incurred by us. The referral fees for facilitating third party sales were $19,612 for the first nine months of 2017 versus $239,221 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.

Selling, General and Administrative Expenses
Selling, general and administrative expenses, exclusive of sales commissions, were $1,231,863, or 14.9% of revenues, in the first nine months of 2017 versus $1,451,423, or 27.3% of revenues, in the first nine months of 2016. These expenses decreased $219,560, or 15.1%,at least one year from the first ninedate that the accompanying financial statements are issued. We estimate that within twelve months from the date of 2016. These decreases are largelyissuing these financial statements, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements.

We used cash from decreases in sales labor costs, decreases in technical training costs, decreases in legal fees, decreases in bad debt expense, and decreases in advertising and business promotion costs. These decreases were offset some by increases in overhead labor and the costcontinuing operations of obtaining and maintaining our ISO 9001 certification.


Commission expense 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$2,020,330 during 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.
Liquidity2023 and Capital Resources
Our cash and cash equivalents balance, when combined with our cash flow from operations during the first nine months 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 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 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 line of credit with a bank providing for demand or short-term borrowings of up 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 current cash position and operating plan, we anticipate that we will be able to meet our cash requirements for at leastover the twelve months from the date of filingthese financial statements our operating activities may use as much as $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 from: 1) the sale of the common stock of GMDC held by the Company; and, 2) 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 sufficient to meet our foreseeable facility requirement. Should we need additional space to accommodate increased activities, management believes we can secure such additional spacehas no further borrowing capacity thereunder. The line of credit expires on reasonable terms.
We haveJanuary 16, 2024. The Company has no material commitments for capital spending nor any plans for material capital expenditures.

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We have no off-balance sheet arrangements.


WaveDancer, Inc.

Form 10-Q September 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 September 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 September 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 September 30, 2023

 

PART II  -  OTHER INFORMATION

Item 1.        Legal Proceedings
  None.
Item 1A.     Risk Factors

Item 1.Legal Proceedings

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.

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 6.       Exhibits
2022.

10.16

Item 2.

Eighth Amendment to Loan Agreement regarding Line

Unregistered Sales of Credit Agreement with TD Bank, N.A., successor to Commerce Bank, N.A., dated May 28, 2017.Equity Securities and Use of Proceeds

On September 27, 2023, the Company sold 35,000 shares of common stock at a price of $5.00 per share in a private placement offering from which it raised aggregate gross proceeds of $175,000. The Company relied upon Rule 506(b) of Regulation D in issuing these shares. No placement fees or commissions were paid in connection with the offering. The proceeds are for use for general corporate purposes.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None.

WaveDancer, Inc.

Form 10-Q September 30, 2023

Item 6.Exhibits

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)

28


WaveDancer, Inc.

Form 10-Q September 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:November 13, 2023 
Sandor Rosenberg, Chairman of the
Board, Chief Executive Officer,
and President

By: 
/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: November 13, 2023By:/s/ Timothy G. Hannon
Timothy G. Hannon,
Chief Financial Officer

29
 19