Commission File Number 00
WaveDancer, Inc.
(Exact name of registrant as specified in its charter)
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) |
Registrant's telephone number, including area code)
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
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 | ☑ | |||||||||||||
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 ☑
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.
This document is also available through our website at http://ir.wavedancer.com/.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
FORM 10-Q
Table of Contents
Page Number | |||
| PART I. | FINANCIAL INFORMATION | ||
| Item 1. | |||
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
Item 4. | 26 | ||
PART II. | 27 | ||
Item 1. | 27 | ||
Item 1A. | 27 | ||
Item 2 | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
| 29 | |||
Item 1. Financial Statements
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
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.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
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 | ||||||
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.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
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 | ||||||
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.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
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 | ||||
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.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
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 |
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.
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.
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.
Use of Estimates and Assumptions
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.
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.
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).
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 | ||
Nature of Products and Services
We generate revenue from boththe sales of information technology professional services, and sales of third-party software licenses and related support. Theimplementation and training services, sales of third-party support and maintenance contracts based on those software products, and incentive payments received from third-party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. We sell through our direct relationships with end customers and under subcontractor arrangements.
WaveDancer, Inc. | Form 10-Q 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.
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 | % | ||||||||
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.
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.
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.
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.
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 does not currently have any other material lease obligations.
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.
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.
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.
Three Months ended September 30, | Nine months ended September 30, | ||||||
2017 | 2016 | 2017 | 2016 | ||||
| Risk free interest rate | 1.87% | n/a | 1.87% | 0.70% - 1.73% | |||
| Dividend yield | 0% | n/a | 0% | 0% | |||
| Expected term | 5 years | n/a | 5 years | 2-10 years | |||
| Expected volatility | 44.6% | n/a | 44.6% | 34.9% - 50.4% | |||
| Three Months | Nine Months | |||||||
Risk-free interest rate | 2.85% - 2.90% | 1.91% - 2.90% | ||||||
Dividend yield | 0 | % | 0 | % | ||||
Expected term (years) | 3.25 - 6.00 | 3.25 - 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 |
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.
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 |
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.
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.
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.
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.
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) |
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:
● | 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.
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.
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.
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.
Revenue
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 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.
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
Revenue
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.
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.
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.
On August 9, 2023, the Company received $1,400,000 of this Form 10-Q.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
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.
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 |
| 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.
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.
Unregistered Sales of | |
| 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. |
Defaults Upon Senior Securities | |
| None. |
Mine Safety Disclosures | |
| Not applicable |
Other Information | |
| None. |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
31.1 | Filed with this Form 10-Q | ||
Filed with this Form 10-Q | |||
Filed with this Form 10-Q | |||
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) |
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.
WaveDancer, Inc. (Registrant) | |||||
| Date: | November 13, 2023 | /s/ G. James Benoit, Jr. | |||
| Date: | November 13, 2023 | By: | /s/ Timothy G. Hannon | ||
| Timothy G. Hannon, | |||||
| Chief Financial Officer | |||||