UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20222023
Or
or |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-41092
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: (703) 383-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | WAVD | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting 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 shares outstanding by each class of common stock, as of November 7, 2022:2023:
Common Stock, $0.001 par value – 19,165,5482,013,180 shares outstanding
This document is also available through our website at http://ir.wavedancer.com/.
WaveDancer, Inc. | Form 10-Q September 30, |
FORM 10-Q
Table of Contents
Page Number | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Unaudited Condensed Consolidated Financial Statements | |
Condensed Consolidated Balance Sheets as of September 30, | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 4. | ||
PART II. | 27 | |
Item 1. | ||
Item 1A. | ||
Item | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
WaveDancer, Inc. | Form 10-Q September 30, |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2022 | December 31, 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 1,521,651 | $ | 4,931,302 | $ | 877,198 | $ | 731,081 | ||||||||
Accounts receivable | 1,532,174 | 1,664,862 | 1,479,780 | 1,629,559 | ||||||||||||
Prepaid expenses and other current assets | 302,443 | 276,990 | 363,668 | 442,445 | ||||||||||||
Total current assets | 3,356,268 | 6,873,154 | 2,720,646 | 2,803,085 | ||||||||||||
Intangible assets, net of accumulated amortization of $1,250,711 and $201,032 | 6,999,289 | 8,048,968 | ||||||||||||||
Intangible assets, net of accumulated amortization of $440,400 and $308,217, respectively | 1,049,600 | 1,181,783 | ||||||||||||||
Goodwill | 5,330,645 | 7,585,269 | 1,125,101 | 1,125,101 | ||||||||||||
Right-of-use operating lease asset | 536,455 | 672,896 | 279,132 | 376,104 | ||||||||||||
Property and equipment, net of accumulated depreciation and amortization of $381,473 and $347,886 | 305,729 | 105,256 | ||||||||||||||
Property and equipment, net of accumulated depreciation and amortization of $423,916 and $391,628, respectively | 66,703 | 98,991 | ||||||||||||||
Other assets | 79,305 | 77,100 | 20,623 | 79,305 | ||||||||||||
Assets held for sale | - | 2,316,845 | ||||||||||||||
Total assets | $ | 16,607,691 | $ | 23,362,643 | $ | 5,261,805 | $ | 7,981,214 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 227,560 | $ | 650,499 | $ | 495,895 | $ | 573,789 | ||||||||
Revolving line of credit | 500,000 | 425,000 | ||||||||||||||
Premium financing note payable | 94,071 | - | ||||||||||||||
Accrued payroll and related liabilities | 701,652 | 524,055 | 604,079 | 676,796 | ||||||||||||
Commissions payable | 225,096 | 224,250 | 24,296 | 125,033 | ||||||||||||
Income taxes payable | 3,101 | 3,101 | ||||||||||||||
Other accrued liabilities | 680,269 | 204,080 | 217,108 | 283,497 | ||||||||||||
Contract liabilities | 37,686 | 186,835 | 26,026 | 182,756 | ||||||||||||
Operating lease liability - current | 203,342 | 192,128 | ||||||||||||||
Operating lease liabilities - current | 218,695 | 203,342 | ||||||||||||||
Deferred acquisition consideration | - | 1,415,098 | ||||||||||||||
Total current liabilities | 2,075,605 | 1,981,847 | 2,183,271 | 3,888,412 | ||||||||||||
Operating lease liability - non-current | 353,486 | 507,120 | ||||||||||||||
Operating lease liabilities - non-current | 134,790 | 303,778 | ||||||||||||||
Deferred tax liabilities, net | 154,252 | 1,167,504 | 59,121 | 59,121 | ||||||||||||
Other liabilities | 1,394,467 | 2,265,000 | ||||||||||||||
Total liabilities | 3,977,810 | 5,921,471 | 2,377,182 | 4,251,311 | ||||||||||||
Stockholders' equity | ||||||||||||||||
Common stock, $0.001 par value 100,000,000 shares authorized; 20,808,654 and 18,882,313 shares issued, 19,135,603 and 17,239,697 shares outstanding as of September 30, 2022 and December 31, 2021, respectively | 20,809 | 18,882 | ||||||||||||||
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 | 35,315,514 | 31,789,464 | 36,303,586 | 35,883,831 | ||||||||||||
Accumulated deficit | (21,741,231 | ) | (13,436,963 | ) | (32,455,900 | ) | (31,190,801 | ) | ||||||||
Treasury stock, 1,673,051 and 1,642,616 shares at cost, as of September 30, 2022 and December 31, 2021, respectively | (965,211 | ) | (930,211 | ) | ||||||||||||
Treasury stock, 167,305 shares at cost, as of September 30, 2023 and December 31, 2022 | (965,211 | ) | (965,211 | ) | ||||||||||||
Total stockholders' equity | 12,629,881 | 17,441,172 | 2,884,623 | 3,729,903 | ||||||||||||
Total liabilities and stockholders' equity | $ | 16,607,691 | $ | 23,362,643 | $ | 5,261,805 | $ | 7,981,214 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.
WaveDancer, Inc. | Form 10-Q September 30, |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE LOSS
(Unaudited)
Three months ended September 30, | ||||||||
2022 | 2021 | |||||||
Revenues | ||||||||
Professional fees | $ | 2,114,012 | $ | 2,798,105 | ||||
Software sales | 192,367 | 1,501,820 | ||||||
Total revenues | 2,306,379 | 4,299,925 | ||||||
Cost of revenues | ||||||||
Cost of professional fees | 1,724,040 | 1,832,812 | ||||||
Cost of software sales | 100,717 | 1,488,238 | ||||||
Total cost of revenues, excluding depreciation and amortization | 1,824,757 | 3,321,050 | ||||||
Gross profit | 481,622 | 978,875 | ||||||
Selling, general and administrative expenses | 2,926,243 | 1,023,897 | ||||||
Acquisition costs | 38,617 | 39,245 | ||||||
Goodwill impairment | 2,254,624 | - | ||||||
Loss from operations | (4,737,862 | ) | (84,267 | ) | ||||
Other income (expense) | ||||||||
Interest expense | (20,437 | ) | (15,055 | ) | ||||
Other income, net | 3,188 | 3,795 | ||||||
Loss before provision for income taxes | (4,755,111 | ) | (95,527 | ) | ||||
Deferred income tax benefit | 54,592 | - | ||||||
Net loss | $ | (4,700,519 | ) | $ | (95,527 | ) | ||
Comprehensive loss | $ | (4,700,519 | ) | $ | (95,527 | ) | ||
Net loss per common share - basic | $ | (0.26 | ) | $ | (0.01 | ) | ||
Net loss per common share - diluted | $ | (0.26 | ) | $ | (0.01 | ) | ||
Weighted average common shares outstanding | ||||||||
Basic | 18,382,131 | 12,596,126 | ||||||
Diluted | 18,382,131 | 12,596,126 |
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 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.
WaveDancer, Inc. | Form 10-Q September 30, |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE (LOSS) INCOME
(Unaudited)
Nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
Revenues | ||||||||
Professional fees | $ | 7,025,396 | $ | 8,565,639 | ||||
Software sales | 2,593,877 | 3,885,828 | ||||||
Total revenues | 9,619,273 | 12,451,467 | ||||||
Cost of revenues | ||||||||
Cost of professional fees | 5,401,666 | 5,698,407 | ||||||
Cost of software sales | 2,430,139 | 3,798,607 | ||||||
Total cost of revenues, excluding depreciation and amortization | 7,831,805 | 9,497,014 | ||||||
Gross profit | 1,787,468 | 2,954,453 | ||||||
Selling, general and administrative expenses | 8,880,973 | 2,523,340 | ||||||
Acquisition costs | 829,478 | 192,530 | ||||||
Change in fair value of contingent consideration | (930,000 | ) | - | |||||
Goodwill impairment | 2,254,624 | - | ||||||
(Loss) income from operations | (9,247,607 | ) | 238,583 | |||||
Other income (expense) | ||||||||
Interest expense | (59,574 | ) | (31,738 | ) | ||||
Other income, net | 3,977 | 11,600 | ||||||
(Loss) income before provision for income taxes | (9,303,204 | ) | 218,445 | |||||
Deferred income tax benefit | 998,936 | - | ||||||
Net (loss) income | $ | (8,304,268 | ) | $ | 218,445 | |||
Comprehensive (loss) income | $ | (8,304,268 | ) | $ | 218,445 | |||
Net (loss) income per common share - basic | $ | (0.47 | ) | $ | 0.02 | |||
Net (loss) income per common share - diluted | $ | (0.47 | ) | $ | 0.02 | |||
Weighted average common shares outstanding | ||||||||
Basic | 17,688,528 | 11,957,878 | ||||||
Diluted | 17,688,528 | 12,584,914 |
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 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.
WaveDancer, Inc. | Form 10-Q September 30, |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net (loss) income | $ | (8,304,268 | ) | $ | 218,445 | |||||||||||
Adjustments to reconcile net (loss) income to net cash used in 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 | 1,083,266 | 111,123 | 164,471 | 165,770 | ||||||||||||
Goodwill impairment | 2,254,624 | - | ||||||||||||||
Stock-based compensation | 1,455,835 | 220,455 | 557,147 | 1,187,552 | ||||||||||||
Deferred income tax benefit | (1,013,252 | ) | - | |||||||||||||
Deferred income tax expense | - | 775,257 | ||||||||||||||
Amortization of right-of-use assets | 136,441 | 54,652 | 96,972 | 136,441 | ||||||||||||
Non-cash interest expense | 59,467 | - | ||||||||||||||
Change in fair value of contingent consideration liability | (930,000 | ) | - | |||||||||||||
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 | 132,688 | (820,954 | ) | 149,779 | 132,688 | |||||||||||
Prepaid expenses and other current assets | 84,842 | (140,015 | ) | 61,925 | 84,842 | |||||||||||
Contract assets | - | 210,688 | ||||||||||||||
Other assets | 58,682 | - | ||||||||||||||
Accounts payable | (422,939 | ) | 508,408 | (77,894 | ) | (422,939 | ) | |||||||||
Contract liabilities | (149,149 | ) | (868,839 | ) | (156,730 | ) | (149,149 | ) | ||||||||
Accrued payroll and related liabilities and other accrued liabilities | 653,786 | 63,404 | (139,106 | ) | 653,786 | |||||||||||
Operating lease liability | (142,420 | ) | (37,989 | ) | (153,635 | ) | (142,420 | ) | ||||||||
Commissions payable | 846 | 54,812 | (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 | (5,100,233 | ) | (425,810 | ) | (2,713,436 | ) | (5,100,233 | ) | ||||||||
Cash flows from investing activities | ||||||||||||||||
Acquisition of property and equipment | (234,060 | ) | (56,010 | ) | - | (234,060 | ) | |||||||||
Acquisition of Tellenger, net of cash acquired | - | (2,233,884 | ) | |||||||||||||
Net cash used in investing activities | (234,060 | ) | (2,289,894 | ) | ||||||||||||
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 | ||||||||||||||||
Borrowing under revolving line of credit | - | 502,306 | ||||||||||||||
Borrowings under revolving line of credit | 575,000 | - | ||||||||||||||
Repayments under revolving line of credit | - | (100,000 | ) | (500,000 | ) | - | ||||||||||
Borrowing under long-term note | - | 1,000,000 | ||||||||||||||
Repayments of long-term note | - | (251,849 | ) | |||||||||||||
Premium financing borrowings | 305,759 | - | ||||||||||||||
Premium financing repayments | (211,688 | ) | - | |||||||||||||
Proceeds from issuance of stock | 1,887,000 | 3,294,554 | 347,108 | 1,887,000 | ||||||||||||
Proceeds from exercise of stock options | 37,642 | 95,146 | 7,400 | 37,642 | ||||||||||||
Net cash provided by financing activities | 1,924,642 | 4,540,157 | 523,579 | 1,924,642 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (3,409,651 | ) | 1,824,453 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 146,117 | (3,409,651 | ) | |||||||||||||
Cash and cash equivalents, beginning of year | 4,931,302 | 1,858,160 | ||||||||||||||
Cash and cash equivalents, end of year | $ | 1,521,651 | $ | 3,682,613 | ||||||||||||
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 | $ | 1,002 | $ | 32,197 | $ | 18,356 | $ | 1,002 | ||||||||
Non-cash investing and financing activities | ||||||||||||||||
Value of common stock issued in connection with: | ||||||||||||||||
Common stock purchase agreement | $ | 112,500 | $ | - | ||||||||||||
Acquisition of Tellenger, Inc. | $ | - | $ | 200,000 | ||||||||||||
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 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statementsstatements.
WaveDancer, Inc. | Form 10-Q September 30, |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Nine months ended September 30, 2022 | Shares of | |||||||||||||||||||||||||||||||||||||||||||
Additional | Common | Additional | ||||||||||||||||||||||||||||||||||||||||||
Common | Paid-In | Accumulated | Treasury | Stock | Common | Paid-In | Accumulated | Treasury | ||||||||||||||||||||||||||||||||||||
Stock | Capital | Deficit | Stock | Total | Issued | Stock | Capital | Deficit | Stock | Total | ||||||||||||||||||||||||||||||||||
Balances at December 31, 2021 | $ | 18,882 | $ | 31,789,464 | $ | (13,436,963 | ) | $ | (930,211 | ) | $ | 17,441,172 | ||||||||||||||||||||||||||||||||
Balances at December 31, 2022 | 2,083,860 | $ | 2,084 | $ | 35,883,831 | $ | (31,190,801 | ) | $ | (965,211 | ) | $ | 3,729,903 | |||||||||||||||||||||||||||||||
Net loss | - | - | (2,078,307 | ) | - | (2,078,307 | ) | - | - | - | (1,349,952 | ) | - | (1,349,952 | ) | |||||||||||||||||||||||||||||
Stock option compensation | - | 312,176 | - | - | 312,176 | - | - | 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 | 105 | 26,694 | - | - | 26,799 | 2,000 | 2 | 7,398 | - | - | 7,400 | |||||||||||||||||||||||||||||||||
Balances at March 31, 2022 | 18,987 | 32,128,334 | (15,515,270 | ) | (930,211 | ) | 15,701,840 | |||||||||||||||||||||||||||||||||||||
Net loss | - | - | (1,525,442 | ) | - | (1,525,442 | ) | |||||||||||||||||||||||||||||||||||||
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 | - | 529,565 | - | - | 529,565 | - | - | 88,159 | - | - | 88,159 | |||||||||||||||||||||||||||||||||
Issuance of stock from exercise of options | 52 | 8,340 | - | - | 8,392 | |||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2022 | 19,039 | 32,666,239 | (17,040,712 | ) | (930,211 | ) | 14,714,355 | |||||||||||||||||||||||||||||||||||||
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 | - | - | (4,700,519 | ) | - | (4,700,519 | ) | - | - | - | (149,932 | ) | - | (149,932 | ) | |||||||||||||||||||||||||||||
Stock option compensation | - | 614,094 | - | - | 614,094 | - | - | 180,816 | - | - | 180,816 | |||||||||||||||||||||||||||||||||
Stock issued | 1,663 | 1,997,837 | - | - | 1,999,500 | 55,000 | 55 | 290,787 | - | - | 290,842 | |||||||||||||||||||||||||||||||||
Issuance of stock from exercise of options | 107 | 37,344 | - | (35,000 | ) | 2,451 | ||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2022 | $ | 20,809 | $ | 35,315,514 | $ | (21,741,231 | ) | $ | (965,211 | ) | $ | 12,629,881 | ||||||||||||||||||||||||||||||||
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 |
Nine months ended September 30, 2021 | Shares of | |||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2020 | $ | 129,043 | $ | 14,720,065 | $ | (12,305,514 | ) | $ | (930,211 | ) | $ | 1,613,383 | ||||||||||||||||||||||||||||||||
Net income | - | - | 270,815 | - | 270,815 | |||||||||||||||||||||||||||||||||||||||
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 | - | 27,711 | - | - | 27,711 | - | - | 312,176 | - | - | 312,176 | |||||||||||||||||||||||||||||||||
Stock issued | 3,306 | 492,693 | - | - | 495,999 | |||||||||||||||||||||||||||||||||||||||
Issuance of stock from exercise of options | 250 | 3,300 | - | - | 3,550 | 10,500 | 11 | 26,788 | - | - | 26,799 | |||||||||||||||||||||||||||||||||
Balances at March 31, 2021 | 132,599 | 15,243,769 | (12,034,699 | ) | (930,211 | ) | 2,411,458 | |||||||||||||||||||||||||||||||||||||
Net income | - | - | 43,157 | - | 43,157 | |||||||||||||||||||||||||||||||||||||||
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 | - | 111,862 | - | - | 111,862 | - | - | 529,565 | - | - | 529,565 | |||||||||||||||||||||||||||||||||
Stock issued | 683 | 197,872 | - | - | 198,555 | |||||||||||||||||||||||||||||||||||||||
Issuance of stock from exercise of options | 3,600 | 76,395 | - | - | 79,995 | 5,200 | 5 | 8,387 | - | - | 8,392 | |||||||||||||||||||||||||||||||||
Balances at June 30, 2021 | 136,882 | 15,629,898 | (11,991,542 | ) | (930,211 | ) | 2,845,027 | |||||||||||||||||||||||||||||||||||||
Balances at June 30, 2022 | 1,903,931 | 1,904 | 32,683,374 | (17,040,712 | ) | (930,211 | ) | 14,714,355 | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | (95,527 | ) | - | (95,527 | ) | - | - | - | (4,700,519 | ) | - | (4,700,519 | ) | |||||||||||||||||||||||||||||
Stock option compensation | - | 80,882 | - | - | 80,882 | - | - | 614,094 | - | - | 614,094 | |||||||||||||||||||||||||||||||||
Stock issued | 14,000 | 2,786,000 | - | - | 2,800,000 | 166,300 | 166 | 1,999,334 | - | - | 1,999,500 | |||||||||||||||||||||||||||||||||
Issuance of stock from exercise of options | 650 | 10,951 | - | - | 11,601 | 10,700 | 11 | 37,440 | - | (35,000 | ) | 2,451 | ||||||||||||||||||||||||||||||||
Balances at September 30, 2021 | $ | 151,532 | $ | 18,507,731 | $ | (12,087,069 | ) | $ | (930,211 | ) | $ | 5,641,983 | ||||||||||||||||||||||||||||||||
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 statementsstatements.
WaveDancer, Inc. | Form 10-Q September 30, |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Summary of Significant Accounting Policies |
Note 1.Summary of Significant Accounting Policies
Organization and Business
WaveDancer, Inc. (“WaveDancer”), formerly knownFounded in 1979 as Information Analysis Incorporated (“IAI”), IAI changed its name to WaveDancer, Inc. (“WaveDancer” or the “Company”) and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is engaged in providingthe business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to U.S. government agencies to modernize information technology services, in selling and supportingcommercial organizations.
On thirdMarch 17, 2023, -party software, primarily Adobe products, to U.S. government agencies, and, with our December, 2021 acquisitionthe Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI” or “Gray Matters”), in providing blockchain enabled supply chain management software solutions to Gray Matters Data Corporation (“SCM”GMDC”). WithSubsequent to the acquisitionsale, 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 began implementing a strategy to expand our offerings well beyond systems modernization services and sales of third-party software. Our Chief Executive Officer, as the chief operating decision maker (“CODM”), organizes our company, manages resource allocations, and measures performance among had two operating and reportable segments: Tellenger and GMI.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, 2022, 2023, the Company generated aan operating loss from continuing operations of $9,247,607.$978,459. As of September 30, 2022, 2023, the Company had working capital of $1,280,663,$537,375 including cash and cash equivalents of $1,521,651,$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 had an accumulated deficiton August 9, 2023, the Company received $1,400,000 of $21,741,231 .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 intends to continue to invest in its SCM platform and to execute its strategy to become a leading zero trust, blockchain-enabled cybersecurity company and believes strongly inis evaluating strategic alternatives which include the long-term viabilitypotential merger or sale of our strategy. However, executing our strategy requires additional sources of capital which we are pursuing, including acquisitions or mergers.the Company. There is no assurance that such activities will result in any transactions or provide additional capital, which createscapital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying unaudited condensed consolidated financial statements are issued.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Reverse Stock Split
On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $0.001 per share, (the “Common Stock”) at a ratio of one-for-ten (the “Reverse Stock Split”). The Reverse Stock split affected all issued common stock and options and warrants to acquire common stock. No fractional shares were issued as a result of the reverse split and any fractional share otherwise issuable were rounded up to the nearest whole number. All shares and per share amounts in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split. Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834 pre-split shares to approximately 1,980,983 post-split shares, before finalizing the rounding of fractional shares. As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 8-03 of Regulation 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 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 the Company’s audited financial statements for the year ended December 31, 2021 2022included in the Annual Report on Form 10-K filed by the Company with the SEC on April 12, 202217, 2023 (the “Annual Report”), as amended. The accompanying December 31, 2021 2022 condensed consolidated balance sheet was derived from the 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 September 30, 2022, and for the three- and nine-month periods months ended September 30, 2022 2023include 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 disclosing our policy for software development costs since these costs are now, and will likely continue to be, material, and a clarification of our policy for goodwill and intangibles, both as discussed in “Equity Method Investments” below, there have been no changes in the Company’s significant accounting policies as of September 30, 2022, 2023, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report.
Equity Method Investments
The Company accounts for investments in which it owns between 20%
In connection with the sale of GMI to GMDC on March 17, 2023, (the "Sale Date"), the Company received common stock in GMDC representing approximately 24.9% of the equity of GMDC. See Note 2 for further information about the sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation. The Company accounted for its investment in GMDC in accordance with the equity method from March 17, 2023 through August 9, 2023. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. As of September 30, 2023 the Company has no equity investment in GMDC and any other equity exposure to the GMI business.
Use of Estimates
Preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates due to uncertainties, including the impact of rising interest rates on valuation methods as discussed in Note 5 Fair Value Measurements.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 units;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; and contingent consideration 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.
Reclassification
Beginning with the three months ended March 31, 2022, our condensed consolidated statement of cash flows presents separately the amortization of the right-of-use operating lease asset as a non-cash adjustment from net income and the change in the operating lease liability due to cash payments as a change in operating assets and liabilities. Previously, the net of these amounts was reported as a change in operating assets and liabilities. Amounts on the condensed consolidated statement of cash flows for the nine months ended September 30, 2021, have been reclassified to conform to the current year presentation.
Software Development Costs
The Company capitalizes costs related to software developed or obtained for internal use in accordance with the ASC 350-40, Internal-Use Software (“ASC 350-40”). The following illustrates the various stages and related processes of computer software development in accordance with ASC 350-40:
|
|
|
|
|
|
The Company is continuing to develop its blockchain SCM software which it markets under a Software as a Service ("SaaS") model, whereby, a customer does not take possession of the Company’s software; rather, the software is accessed on an as-needed basis over the Internet.
Therefore, when the software is used to produce a product or in a process to provide a service to a customer, and the customer is not given the right to obtain or use the software, the related costs are accounted for in accordance with ASC 350-40. When a hosting arrangement includes multiple modules or components, capitalized costs are amortized on a module-by-module basis. When a module or component is substantially ready for its intended use, amortization begins, regardless of whether the overall hosting arrangement is being placed in service in planned stages. If the module’s functionality is entirely dependent on the completion of one or more other modules, then amortization does not begin until that group of interdependent modules is substantially ready for use.
As of September 30, 2022 we had $214,251 of capitalized internal use software development costs and zero accumulated amortization. Capitalized software development costs are included in plant and equipment on the condensed consolidated balance sheets.
Intangibles and Goodwill
The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Goodwill – Intangibles and Other (“ASC 350”) and has concluded that it has two operating segments, which are also its two reporting units for purposes of goodwill impairment testing. Goodwill is not amortized but instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit may be below its carrying value. These circumstances include, but are not limited to, significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s planned revenue or earnings. Management evaluates the recoverability of the Company’s goodwill annually on October 31 or more often as events or circumstances indicate the fair value of a reporting unit is below its carrying value, including goodwill. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the reporting unit carrying amount exceeds the estimated fair value of the reporting unit.
Management evaluates the recoverability of the Company’s indefinite-lived intangible assets (tradenames) annually on October 31, or more often when events or circumstances indicate a potential impairment exists.
Management evaluates the recoverability of the Company’s finite-lived intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets or asset groups that contain those assets. If impairment is indicated based on a comparison of an asset group’s carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.
Income Taxes
Deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. In addition, a valuation allowance is required to be recognized if it is believed more likely than not that a deferred tax asset will not be fully realized. Authoritative guidance prescribes a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements. The Company has analyzed its income tax positions using the criteria required by GAAP and concluded that as of September 30, 2022, and December 31, 2021, it has no material uncertain tax positions and no interest or penalties have been accrued. The Company expects that recent tax law changes contained in the Inflation Reduction Act and CHIPS Act will not have a material impact on its provision for income taxes.
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 subcontracts 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, and 5.8% of revenue came from commercial and local government contracts.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 threenine months ended September 30, 2021, 2023, the Company’s prime contracts with U.S. government agencies represented 37.0%9.1% of revenue and subcontracts under federal procurements represented 62.9%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 0.2%subcontracts under federal procurements represented 67.8% of revenue came from commercial and local government contracts.revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 32.5%27.4%, 11.4%16.5%, and 10.6%10.5% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 45.8%41.4% of the Company’s revenue in aggregate.
During the
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
During the nine months ended September 30, 2021 the Company’s prime contracts with U.S. government agencies represented 35.1% of revenue and subcontracts under federal procurements represented 63.5% of revenue, and 1.4% of revenue came from commercial and local government contracts. The terms of these contracts and subcontracts vary from single transactions to five years. One subcontract under federal procurements represented 33.1% of revenue. Revenue from one prime contractor under which the Company has multiple subcontracts represented 44.3% of the Company’s revenue in aggregate.
The Company sold third-party software and maintenance contracts under agreements with one major supplier, accounting for 8.3%9.7% and 34.8%11.8% of total revenue during the three months- and nine-months ended September 30, 2022and 2021, respectively, and 27.0% and 30.8% of total revenue during the nine months ended September 30, 2022 and 2021,, respectively.
As of September 30, 2022, 2023, 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.
As
Note 2.Sale and Deconsolidation of GMI and Discontinued Operations
On September 30, 2021,March 17, 2023, receivables from one prime contractorthe 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 has multiple subcontracts represented 63.7%sold all of the Company’s outstanding accountsshares 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 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 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 also 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 aggregate.
cash for $1,000,000 and a gain of $318,000 was recognized during the three months ended September 30, 2023 (see Note 5).
WaveDancer, Inc. | Form 10-Q September 30, |
The following table sets forth details of net earnings from discontinued operations for the nine months ended September 30, 2023 and 2022, which reflects the results of the Blockchain SCM operating segment through the date our controlling financial interest in it was sold – March 17, 2023 (See Note 1).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenue | $ | - | $ | - | $ | - | $ | 566,862 | ||||||||
Cost of revenue | - | 256,974 | 74,223 | 1,118,301 | ||||||||||||
Excess of contract costs over revenue | - | (256,974 | ) | (74,223 | ) | (551,439 | ) | |||||||||
Operating expenses - | ||||||||||||||||
Salaries and benefits | - | 463,502 | 484,249 | 1,076,781 | ||||||||||||
Intangibles amortization | - | 303,791 | 85,338 | 917,496 | ||||||||||||
Stock based compensation, before forfeitures | - | 215,775 | 65,487 | 268,283 | ||||||||||||
Forfeiture of stock options | - | - | (407,322 | ) | - | |||||||||||
Other operating expenses | - | 113,078 | 134,633 | 702,534 | ||||||||||||
Change in fair value of contingent consideration | - | - | - | (930,000 | ) | |||||||||||
Goodwill impairment | - | 2,254,624 | 2,254,624 | |||||||||||||
Gain on disposal of business | - | - | (100,615 | ) | - | |||||||||||
Loss before income tax benefit | - | (3,607,744 | ) | (335,993 | ) | (4,841,157 | ) | |||||||||
Income tax benefit | - | 77,592 | - | 1,788,509 | ||||||||||||
Net loss on discontinued operations | $ | - | $ | (3,530,152 | ) | $ | (335,993 | ) | $ | (3,052,648 | ) |
During the nine months ended September 30, 2023, there was a total of 715,000 unvested stock options forfeited by GMI employees, including 527,500 forfeited by employees who resigned from WaveDancer, on the Sale Date, and were offered employment by GMDC. Stock-based compensation expense of $407,322, previously recognized for these forfeited options, was taken back into income in March 2023.
The following table presents the components of the assets of our discontinued operations that were classified as held for sale as of December 31, 2022. As of March 31, 2023, GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet.
December 31, | ||||
2022 | ||||
Customer relationship intangible asset, net of amortization | $ | 1,057,722 | ||
Technology intangible asset, net of amortization | 760,698 | |||
Capitalized software development costs | 498,425 | |||
Total assets of discontinued operations | $ | 2,316,845 |
Note 2.3. Revenue from Contracts with Customers
Nature of Products and Services
We generate revenue from the sales of information technology professional services, sales of third-party software licenses and implementation 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. In addition, with the GMI acquisition, we expanded our offerings to include licensing and implementation services for proprietary blockchain-based SCM software. 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 it has the right to invoice the customer. For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time.
Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses. The Company’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 the full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to implementation 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 the administrative portal. Revenue for bulk desktop software licenses for non-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 the administrative portal. For desktop software licenses sold on an individual license basis to non-government customers, where the Company 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 the 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 customer, but the sale occurs directly between the customer and the supplier 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, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
Contract Type | Amount | Percentage | Amount | Percentage | ||||||||||||
Services time & materials | $ | 1,896,829 | 82.2 | % | $ | 2,705,099 | 62.9 | % | ||||||||
Services fixed price over time | 58,965 | 2.6 | % | 19,175 | 0.5 | % | ||||||||||
Services combination | 50,440 | 2.2 | % | 47,060 | 1.1 | % | ||||||||||
Services fixed price per unit | 107,778 | 4.7 | % | 26,771 | 0.6 | % | ||||||||||
Third-party software | 59,076 | 2.6 | % | 1,445,757 | 33.6 | % | ||||||||||
Software support & maintenance | 44,804 | 1.9 | % | 48,421 | 1.1 | % | ||||||||||
Incentive payments | 88,487 | 3.8 | % | 7,642 | 0.2 | % | ||||||||||
Total revenue | $ | 2,306,379 | 100.0 | % | $ | 4,299,925 | 100.0 | % |
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, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||
Contract Type | Amount | Percentage | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||||||||||||||
Services time & materials | $ | 5,963,361 | 62.0 | % | $ | 7,519,190 | 60.4 | % | $ | 5,314,845 | 86.4 | % | $ | 5,963,361 | 65.9 | % | ||||||||||||||||
Services fixed price over time | 161,273 | 1.7 | % | 452,726 | 3.6 | % | 307,206 | 5.0 | % | 161,273 | 1.8 | % | ||||||||||||||||||||
Firm fixed price | 566,862 | 5.9 | % | - | - | |||||||||||||||||||||||||||
Services combination | 80,520 | 0.8 | % | 506,331 | 4.1 | % | 99,270 | 1.6 | % | 80,520 | 0.9 | % | ||||||||||||||||||||
Services fixed price per unit | 253,379 | 2.6 | % | 87,391 | 0.7 | % | 271,394 | 4.4 | % | 253,379 | 2.8 | % | ||||||||||||||||||||
Third-party software | 2,345,884 | 24.4 | % | 3,683,967 | 29.6 | % | 159,307 | 2.6 | % | 2,345,884 | 25.9 | % | ||||||||||||||||||||
Software support & maintenance | 142,891 | 1.5 | % | 150,696 | 1.2 | % | - | 0.0 | % | 142,891 | 1.6 | % | ||||||||||||||||||||
Incentive payments | 105,103 | 1.1 | % | 51,166 | 0.4 | % | - | 0.0 | % | 105,103 | 1.1 | % | ||||||||||||||||||||
Total revenue | $ | 9,619,273 | 100.0 | % | $ | 12,451,467 | 100.0 | % | $ | 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 has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized as of September 30, 2022 2023and December 31, 2021.2022.
Accounts receivable as of September 30, 2022 2023and December 31, 2021, 2022, consist of the following:
September 30, 2022 | December 31, 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||
Billed federal government | $ | 1,491,705 | $ | 1,594,473 | $ | 1,456,519 | $ | 1,573,407 | ||||||||
Billed commercial | 40,469 | - | ||||||||||||||
Billed commercial and local government | 22,000 | 56,152 | ||||||||||||||
Unbilled receivables | - | 70,389 | 1,261 | - | ||||||||||||
Accounts receivable | $ | 1,532,174 | $ | 1,664,862 | $ | 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 Assets
Contract assets consist of assets resulting when revenue recognized exceeds the amount billed or billable to the customer due to allocation of transaction price, and of amounts withheld from payment of invoices as a financing component of a contract. There were no amounts recorded to contract assets as of September 30, 2022 or December 31, 2021. Changes in contract assets balances in the nine months ended September 30, 2021, were as follows:
Balance as of December 31, 2020 | $ | 210,688 | ||
Contract assets added | 131,923 | |||
Balance as of March 31, 2021 | 342,611 | |||
Contract assets added | 134,657 | |||
Balance as of June 30, 2021 | 477,268 | |||
Contract assets added | 45,895 | |||
Reduction in contract assets | (523,163 | ) | ||
Balance as of September 30, 2021 | $ | - |
Contract Liabilities
Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Changes in contracts liabilities balances in the three months and nine months ended September 30, 2022 and 2021,are as follows:
Balance as of December 31, 2021 | $ | 186,835 | ||||||
Balance at December 31, 2022 | $ | 182,756 | ||||||
Contract liabilities added | 19,280 | - | ||||||
Revenue recognized | (56,423 | ) | (55,665 | ) | ||||
Balance as of March 31, 2022 | 149,692 | |||||||
Balance at March 31, 2023 | 127,091 | |||||||
Contract liabilities added | 87,612 | - | ||||||
Revenue recognized | (71,461 | ) | (55,088 | ) | ||||
Balance as of June 30, 2022 | 165,843 | |||||||
Balance at June 30, 2023 | 72,003 | |||||||
Contract liabilities added | 2,491 | - | ||||||
Revenue recognized | (130,648 | ) | (45,977 | ) | ||||
Balance as of September 30, 2022 | $ | 37,686 | ||||||
Balance at September 30, 2023 | $ | 26,026 |
Balance as of December 31, 2020 | $ | 946,884 | ||||||
Balance at December 31, 2021 | $ | 186,835 | ||||||
Contract liabilities added | 93,934 | 19,280 | ||||||
Revenue recognized | (585,322 | ) | (56,423 | ) | ||||
Balance as of March 31, 2021 | 455,496 | |||||||
Balance at March 31, 2022 | 149,692 | |||||||
Contract liabilities added | 4,815 | 87,612 | ||||||
Revenue recognized | (354,427 | ) | (71,461 | ) | ||||
Balance as of June 30, 2021 | 105,884 | |||||||
Balance as of June 30, 2022 | 165,843 | |||||||
Contract liabilities added | 79,640 | 2,491 | ||||||
Revenue recognized | (107,479 | ) | (130,648 | ) | ||||
Balance as of September 30, 2021 | $ | 78,045 | ||||||
Balance at September 30, 2022 | $ | 37,686 |
Revenues recognized during the three months ended September 30, 20222023 and 2021,2022, from the balances as of December 31, 2021 2022and 2020,2021, were $48,708$45,977 and $58,556,$48,708, respectively. Revenues recognized during the nine months ended September 30, 20222023 and 2021,2022, from the balances as of December 31, 2021 2022and 2020,2021, were $160,809$156,730 and $946,884,$160,809, respectively.
WaveDancer, Inc. | Form 10-Q September 30, |
Costs to Obtain or Fulfill a Contract
When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it would not have incurred those costs if the contract had not been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There were no such assets as of September 30, 2022 and December 31, 2021. When incurred, these costs are amortized ratably over the periods of the contracts to which those costs apply.
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 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 infor thethree and nine months ended September 30, 2022, and 2021,are as follows:
Balance as of December 31, 2021 | $ | 154,218 | ||
Deferred costs added | 2,800 | |||
Deferred costs expensed | (55,362 | ) | ||
Balance as of March 31, 2022 | 101,656 | |||
Deferred costs expensed | (53,434 | ) | ||
Balance as of June 30, 2022 | 48,222 | |||
Deferred costs expensed | (48,222 | ) | ||
Balance as of September 30, 2022 | $ | - |
Balance as of December 31, 2020 | $ | 89,068 | ||
Deferred costs added | 17,406 | |||
Deferred costs expensed | (75,223 | ) | ||
Balance as of March 31, 2021 | 31,251 | |||
Deferred costs added | 11,188 | |||
Deferred costs expensed | (16,681 | ) | ||
Balance as of June 30, 2021 | 25,758 | |||
Deferred costs added | 194,686 | |||
Deferred costs expensed | (33,118 | ) | ||
Balance as of September 30, 2021 | $ | 187,326 |
Note 3.Segment Financial Information
In periods earlier than the quarter ended September 30, 2022, we managed our business as a single operating segment. During the quarter ended September 2022, we reassessed our business strategy and our CODM changed his approach to managing the business and allocating resources. As a result, we determined that we have two operating segments: Tellenger and Blockchain SCM. Tellenger provides professional services, primarily to US government agencies, related to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, and data analytics. The Blockchain SCM segment is an early-stage business focused on developing, marketing, and selling a SaaS supply chain management platform built on blockchain technology.
No separate revenues and operating income for the Blockchain SCM operating segment are presented for the three- and nine-month periods ended September 30, 2021, since we did not own this SCM business during such prior periods.
Three Months Ended 9/30/22 | Nine Months Ended 9/30/22 | ||||||||||||||||||||||
Tellenger | Blockchain | Corporate | Consolidated | Tellenger | Blockchain | Corporate | Consolidated | ||||||||||||||||
Revenue | $ | 2,306,379 | $ | - | $ | - | $ | 2,306,379 | $ | 9,052,411 | $ | 566,862 | $ | - | $ | 9,619,273 | |||||||
Operating income (loss) | $ | 250,712 | $ | (3,292,257 | ) | $ | (1,696,317 | ) | $ | (4,737,862 | ) | $ | 661,394 | $ | (4,124,511 | ) | $ | (5,784,490 | ) | $ | (9,247,607 | ) | |
Interest expense | (20,437 | ) | (59,574 | ) | |||||||||||||||||||
Other income, net | 3,188 | 3,977 | |||||||||||||||||||||
Loss before provision for income taxes | $ | (4,755,111 | ) | $ | (9,303,204 | ) |
Corporate operating loss primarily includes stock-based compensation expenses, acquisition-related costs, and other expenses related to executive, legal, finance, tax, and investor relations expenses.
As of September 30, 2022 | ||||||||
Tellenger | Blockchain SCM | Corporate | Consolidated | |||||
Intangible assets | $ | 1,225,844 | $ | 5,773,445 | $ | - | $ | 6,999,289 |
Total assets | $ | 6,858,228 | $ | 7,137,786 | $ | 2,611,677 | $ | 16,607,691 |
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 two significant operating leases, one for its headquarters offices in 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. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company’s condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021.
As of September 30, 2022 2023and December 31, 2021, 2022, the Company does not have any sales-type or direct financing leases.
TheEach of the Company’s operating lease asset representsassets represent its right to use an underlying asset for the lease term and the related lease liabilitiesliability 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 lease doesleases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement datedates in determining the present value of lease payments. The operating lease assetassets also includesinclude any lease payments made and excludesexclude lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreement includesagreements include rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liabilityliabilities and operating lease asset.assets. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.
The Company does not sublease any real estate to third parties.
As of September 30, 2022, 2023, our two operating leases had a weighted average remaining lease term of 3728 months and a weighted average discount rate of 5.0%5.1%. Future lease payments under operating leases as of September 30, 2022, 2023, were as follows:
Remainder of 2022 | $ | 56,639 | ||||||
2023 | 228,862 | 58,041 | ||||||
2024 | 174,721 | 174,721 | ||||||
2025 | 74,804 | 74,804 | ||||||
2026 | 70,220 | 70,220 | ||||||
Total lease payments | 605,246 | 377,786 | ||||||
Less: discount | (48,418 | ) | (24,301 | ) | ||||
Present value of lease liabilities | $ | 556,828 | $ | 353,485 |
The total expense incurred related to its operating leases was $53,560$38,053 and $15,985$53,560 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $164,280$118,567 and $68,229$164,281 for the nine months ended September 30, 20222023 and 2021,2022, 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 first two 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 representspresents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2022 2023and December 31, 2021:2022:
September 30, 2022 | September 30, 2023 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 980,112 | $ | - | $ | - | $ | 980,112 | $ | 809,997 | $ | - | $ | - | $ | 809,997 |
December 31, 2021 | December 31, 2022 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 1,600,663 | $ | - | $ | - | $ | 1,660,663 | $ | 58,242 | $ | - | $ | - | $ | 58,242 | ||||||||||||||||
Other liabilities: | ||||||||||||||||||||||||||||||||
Fair value of contingent consideration | $ | - | $ | - | $ | 930,000 | $ | 930,000 |
SeeAs discussed in Note 62 below for an explanationabove, in connection with its sale of GMI, the Company received contingent consideration that requires to GMDC to make annual payments equal to five percent (5%) of the decreasepurchaser’s GAAP based revenue through December 31, 2029, up to a cumulative maximum of $4,000,000, attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. The fair value of the contingent consideration was estimated based on GMDC’s forecast of revenue, the estimated after-tax payments to the Company, and the present value of the after-tax payments based on discount rate that reflects the risk of achieving the timing and amounts of forecasted payments. The significant inputs utilized in estimating the fair value of contingent consideration relatedinclude the forecast of revenues, the income tax rate of 27.0 percent, and the discount rate of 40.75 percent. On August 9, 2023, the Company and GMDC agreed to terminate all rights and obligations with respect to the acquisitioncalculation and payment of Gray Matters, Inc.future contingent payments from GMDC to the Company in exchange for the payment of $1,000,000 cash by GMDC to the Company, resulting in a gain of $318,000.
The following table is a roll-forward of the Level 3 fair value measurements.measurements, which are not considered financial instruments.
Fair value of contingent consideration: | ||||
December 31, 2021 | $ | 930,000 | ||
Change in fair value | 12,609 | |||
March 31, 2022 | 942,609 | |||
Change in fair value | (942,609 | ) | ||
June 30, 2022 | - | |||
Change in fair value | - | |||
September 30, 2022 | $ | - |
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 includedrecognized in income for the three- or nine months-month periods ended September 30, 2022.2023
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table is a summary of gains and losses on assets measured at fair value on a nonrecurring basis:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Impairment of goodwill | $ | 2,254,624 | $ | - | $ | 2,254,624 | $ | - |
During the third quarter of 2022, our Gray Matters reporting unit, which is the same as our Blockchain SCM operating segment, experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, resulted in a decline in the reporting unit’s estimated future cash flows. Accordingly, we performed an interim goodwill impairment test as of September 30, 2022, prior to our annual impairment test.
As a result of the interim goodwill impairment test, the estimated fair value of the Gray Matters reporting unit was determined to be lower than its carrying value. In the third quarter of 2022, we recorded a non-cash pre-tax and after-tax charge of $2,254,624 to impair the carrying value of this reporting unit’s goodwill under the caption, “Goodwill impairment” in the accompanying condensed consolidated statement of operations and comprehensive (loss) income. There were no tax benefits associated with the goodwill impairment charge, since the Gray Matters goodwill is not deductible for tax purposes. The fair value of the reporting unit was determined using an income approach based on a discounted cash flow (“DCF”) model which requires a complex series of judgments about future events and uncertainties and relies heavily on estimates of expected cash flows and like an appropriate discount rate and terminal growth rate. Any changes in key assumptions, including failure to grow the revenue and improve the profitability of GMI, or other unanticipated events and circumstances, may affect such estimates. Fair value assessments of the reporting unit are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. The discount rate and terminal growth rate used in our 2022third quarter interim impairment test for the Gray Matters reporting unit were 22.5% and 3.0%, respectively..
|
|
Tellenger, Inc.
On April 7, 2021, the Company purchased all of the issued and outstanding shares of stock of Tellenger, Inc. (“Tellenger”). Tellenger is primarily engaged in providing professional services related to cybersecurity, cloud computing, and data analytics. Tellenger’s customers include U.S. government agencies, either as a prime contractor or sub-contractor, as well as several national not-for-profit organizations. The purchase price of $2,515,357 was paid with $2,315,357 of cash and 68,264 shares of Company common shares valued at $200,000 as of the transaction closing date. The value of the shares was determined by the closing price as of the transaction date. Goodwill is attributable to human capital related intangible assets like the value of the acquired assembled workforce and strategic and enterprise related intangible assets including growth opportunities that are not reportable separately from goodwill. Goodwill also arises from recognizing deferred tax liabilities from intangible assets that are amortizable for financial reporting but not for income tax purposes. The transaction did not result in a step-up in tax basis and neither the intangible assets nor goodwill recorded for financial reporting purposes results in deductible amortization for tax purposes. The purchase price for Tellenger has been allocated as follows:
Useful | Amounts | Valuation Methodology | ||||||
Cash | $ | 81,473 | ||||||
Accounts receivable | 611,471 | |||||||
Other current assets | 6,338 | |||||||
Intangible assets with estimated useful lives: | ||||||||
Customer relationships | 8 | 1,090,000 | Replacement cost and relief from royalty | |||||
Non-compete agreements | 3 | 120,000 | Multi-period excess earnings | |||||
Intangible assets with indefinite lives: | ||||||||
Trade names | 280,000 | |||||||
Goodwill | 785,000 | |||||||
Total assets acquired | 2,974,282 | |||||||
Current liabilities | (458,925 | ) | ||||||
Net assets acquired | $ | 2,515,357 |
WaveDancer, Inc. | Form 10-Q September 30, |
Gray Matters, Inc.
On December 10, 2021, the Company purchased all the issued and outstanding shares of Gray Matters. Gray Matters provides supply chain management software designed to aggregate customer data into a single, interconnected, blockchain secured framework. The purchase price of $11,005,100 comprises the following:
Net cash consideration | $ | 7,240,100 | ||
Buyer common stock | 1,500,000 | |||
Fair value of deferred consideration | 1,335,000 | |||
Fair value of contingent consideration | 930,000 | |||
Total | $ | 11,005,100 |
Common stock consideration consisted of 436,481 shares of WaveDancer common stock valued at $1,500,000 as of the transaction closing date. The deferred consideration of $1,335,000 is the estimated present value as of the closing date of the $1,500,000 cash payment due to the selling shareholder of GMI (the “Seller”) on the second anniversary of the acquisition. We applied a discount rate of 6% reflecting our recent secured borrowing rate adjusted to include a premium for the unsecured status of the deferred consideration liability. Accretion of the liability will be recorded as interest expense. For the nine months ended September 30, 2022, we recorded $59,467 of interest expense.
Contingent consideration was estimated as of the acquisition date using a probability weighted average of possible outcomes, discounted to its net present value as of the acquisition date. We identified the set of possible outcomes and assigned probabilities to each by applying management judgment to the assumptions underlying the projections of 2022 revenue and gross profit. Under the terms of the purchase agreement, the Seller is eligible to receive from zero up to $4,000,000 of additional consideration, payable in cash, based on the amounts of revenue and gross profit achieved by GMI during the period from the acquisition date through December 31, 2022. We estimated that the outcomes to apply a probability weighting to range from $500,000 to $1,500,000, with an outcome of $1,000,000 given the highest probability weighting. The undiscounted probability weighted outcome was determined to be $1,000,000 and was discounted back to its present value of $930,000 as of December 31, 2021. We applied a discount rate of 6% reflecting our recent secured borrowing rate adjusted to include a premium for the unsecured status of the contingent consideration liability. The contingent consideration liability will be remeasured at fair value at the end of each reporting period and reported in the consolidated statements of operations until the liability is settled.
We remeasured the contingent consideration liability as of June 30, 2022 and determined that the undiscounted probability weighted outcome had decreased to zero and we reduced the liability amount accordingly and for the nine months ended September 30, 2022 we have recognized $930,000 of income.
The deferred consideration liability is included in other liabilities on the condensed consolidated balance sheets and totals $1,394,467 and $1,335,000 as of September 30, 2022 and December 31, 2021, respectively.
Goodwill is attributable to human capital related intangible assets like the value of the acquired assembled workforce and strategic and enterprise related intangible assets including growth opportunities that are not reportable separately from goodwill. Goodwill also arises from recognizing deferred tax liabilities from recording in the purchase accounting intangible assets that are amortizable for financial reporting but not for income tax purposes. The transaction did not result in a step-up in tax basis and the Company will carry over the legacy tax basis of $0 for all intangibles. Neither the intangible assets nor goodwill recorded for financial reporting purposes will generate deductible amortization for tax purposes.
The purchase price for GMI has been allocated as follows:
Useful | Amounts | Valuation Methodology | ||||||
Cash | $ | 20,235 | ||||||
Fixed assets | 8,902 | |||||||
Intangible assets with estimated useful lives: | ||||||||
Technology | 5 | 2,900,000 | Replacement cost and relief from royalty | |||||
Customer relationships | 6 | 3,860,000 | Multi-period excess earnings | |||||
Goodwill | 4,560,099 | |||||||
Total assets acquired | 11,349,236 | |||||||
Current liabilities | (344,136 | ) | ||||||
Net assets acquired | $ | 11,005,100 |
Supplemental Combined Pro Forma Information
The following unaudited pro forma financial information presents combined results of operations for the periods presented as if the acquisitions of both Tellenger and Gray Matters had been completed on January 1, 2021. The pro forma information includes adjustments to amortization expense for the intangible assets acquired.
The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisitions of both Tellenger and Gray Matters occurred on January 1, 2021, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenues | $ | 2,306,379 | $ | 4,299,925 | $ | 9,619,273 | $ | 13,677,429 | ||||||||
Net loss | $ | (4,700,519 | ) | $ | (802,424 | ) | $ | (8,304,268 | ) | $ | (2,128,680 | ) |
Note 7.6. Intangible Assets and Goodwill
Information regarding our intangible assets is as follows:
Weighted Average Useful Life (Years) | December 31, 2021 | Additions | September 30, 2022 | Weighted Average Useful Life (Years) | Balance December 31, 2022 | Additions | Balance September 30, 2023 | ||||||||||||||||||||||||
Intangible assets with estimated useful lives | |||||||||||||||||||||||||||||||
Technology | 5.0 | $ | 2,900,000 | $ | - | $ | 2,900,000 | ||||||||||||||||||||||||
Customer relationships | 6.4 | 4,950,000 | - | 4,950,000 | 8.0 | $ | 1,090,000 | $ | - | $ | 1,090,000 | ||||||||||||||||||||
Non-compete agreements | 3.0 | 120,000 | - | 120,000 | 3.0 | 120,000 | - | 120,000 | |||||||||||||||||||||||
Accumulated amortization | (201,032 | ) | (1,049,679 | ) | (1,250,711 | ) | (308,217 | ) | (132,183 | ) | (440,400 | ) | |||||||||||||||||||
Sub-total | 7,768,968 | (1,049,679 | ) | 6,719,289 | 901,783 | (132,183 | ) | 769,600 | |||||||||||||||||||||||
Intangible assets with indefinite lives | |||||||||||||||||||||||||||||||
Trade names | Indefinite | 280,000 | - | 280,000 | Indefinite | 280,000 | - | 280,000 | |||||||||||||||||||||||
Net identifiable intangible assets | $ | 8,048,968 | $ | (1,049,679 | ) | $ | 6,999,289 | $ | 1,181,783 | $ | (132,183 | ) | $ | 1,049,600 |
Information regarding our goodwill for each operating segment is as follows:
Tellenger | Blockchain SCM | Corporate | Consolidated | |||||||||
Goodwill, gross | ||||||||||||
Balance at December 31, 2021 | $ | 785,000 | $ | 4,560,098 | $ | 2,240,171 | $ | 7,585,269 | ||||
Additions | - | - | - | - | ||||||||
Balance at September 30, 2022 | 785,000 | 4,560,098 | 2,240,171 | 7,585,269 | ||||||||
Cumulative impairment loss | ||||||||||||
Balance at December 31, 2021 | - | - | - | - | ||||||||
Impairment expense | - | (2,254,624 | ) | - | (2,254,624 | ) | ||||||
Balance at September 30, 2022 | - | (2,254,624 | ) | - | (2,254,624 | ) | ||||||
Goodwill, net | ||||||||||||
Balance at December 31, 2021 | $ | 785,000 | $ | 4,560,098 | $ | 2,240,171 | $ | 7,585,269 | ||||
Balance at September 30, 2022 | $ | 785,000 | $ | 2,305,474 | $ | 2,240,171 | $ | 5,330,645 |
See Note 5, Fair Value Measurements, for a discussion of goodwill impairment charges.
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, 2022, 2023, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows:
Remainder of 2022 | $ | 349,893 | ||
2023 | 1,399,572 | |||
2024 | 1,369,635 | |||
2025 | 1,359,576 | |||
2026 | 1,326,854 | |||
Thereafter | 913,759 | |||
Total | $ | 6,719,289 |
2023 | $ | 44,061 | ||
2024 | 146,307 | |||
2025 | 136,248 | |||
2026 | 136,248 | |||
2027 | 136,248 | |||
Thereafter | 170,488 | |||
Total | $ | 769,600 |
Note 8.7. 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. The 2016 Stock Incentive Plan was adopted in 2016 (“2016 Plan”) and had options granted under it through November 15, 2021. On October 11, 2021, the Board of Directors approved the 2021 Stock Incentive Plan (“2021 Plan”) and on December 2, 2021, our shareholders approved the 2021 Plan.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
The Company recognizes compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the awards. There were no option awards granted in the three and nine months ended September 30, 2023. Fair values of option awards granted in the three months ended September 30, 2022 and2021, and the nine months ended September 30, 2022and 2021,, were estimated using the Black-Scholes option pricing model under the following assumptions:
Three months ended September 30, | Nine Months ended September 30, | |||||||||
2022 | 2021 | 2022 | 2021 | |||||||
Risk-free interest rate | 2.85% - 2.90% | 0.84% | 1.91% - 2.90% | 0.46% - 0.92% | ||||||
Dividend yield | 0% | 0% | 0% | 0% | ||||||
Expected term (years) | 3.25 - 6.00 | 5.00 | 3.25 - 6.00 | 5.00 | ||||||
Expected volatility | 45.9% - 48.1% | 46.8% | 45.8% - 48.5% | 47.1% - 92.6% |
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 time-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility to that of 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 the Company in its calculation.
There were 265,00053,500 options with grant date fair values totaling $157,300$168,900, and 30,000131,200 options with grant date fair values totaling $34,500$1,639,870, granted during the three months ended September 30, 2022 and2021, respectively. There were 1,177,000 options with grant date fair values totaling $2,231,970, and 302,500 options with grant date fair values totaling $363,550 granted during the nine months ended September 30, 2022and 2021,, respectively. There were 107,000zero and 65,00010,700 options exercised during the three months ended September 30, 20222023 and 2021,2022, respectively. There were 264,000 options2,000 and 450,00026,400 options exercised during the nine months ended September 30, 20222023 and 2021,2022, respectively. As of September 30, 2022, 2023, there was $2,019,066$431,067 of total unrecognized compensation cost related to non-vestednonvested share-based compensation arrangements granted under the stock incentive plans. Thatplans; that cost is expected to be recognized over a weighted-average period of 9.411 months.
Total compensation expense related to these plans was $614,094$180,816 and $80,882$398,319 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $1,455,835$557,146 and $220,455$971,777 for the nine months ended September 30, 20222023 and 2021,2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.
Note 8.Settlement of Litigation
On April 28, 2023, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”). On January 25, 2023, Gerald, as the result of the termination of his employment, filed a lawsuit against the Company for one year’s severance of $150,000 and benefits to which he claimed he was entitled under his employment agreement with the Company. He had also claimed an anticipatory breach of the payment of $1,500,000 of deferred consideration otherwise due him on December 10, 2023, under the Stock Purchase Agreement between him and the Company and an anticipatory breach to release from escrow 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 second quarter of 2023.
Note 9. Revolving Line of Credit and Notes Payable
On September 30, 2022, the Company entered a revolving line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $1,000,000 at a variable interest rate equal to the prime rate as published in The Wall Street Journal, with a minimum rate of 3.99% and a maximum rate of 20.00%, and subject to a borrowing base calculated using outstanding accounts receivable. Borrowings under the line of credit are secured by the assets of the Company. AsThere were no borrowings and $500,000 of repayments during the three months ended September 30, 2022, 2023there was no outstanding balance under this line of credit, and there were no$575,000 of borrowings orand $500,000 of repayments during the nine months ended September 30, 2022. 2023. This line of credit expired on August 16, 2023.
On September 11, 2023, the Company and Summit entered a new line of credit agreement with the same terms as the preceding agreement, except that the maximum availability under the new line was reduced from $1,000,000 to $500,000. As of September 30, 2022 2023, there is $1,000,000 ofwas $500,000 outstanding and no borrowing availability under this line of credit.
On April 16, 2021, the Company entered a revolving The line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $1,000,000 at a variable interest rate equal to the greater of 3.25% or the prime rate as published in The Wall Street Journal, and subject to a borrowing base calculated using outstanding accounts receivable. Borrowings under the line of credit are secured by the assets of the Company. The line expiredexpires on AprilJanuary 16, 2022. As of December 31 2021, there was no outstanding balance under this line of credit and there were no borrowings or repayments during the nine months ended September 30, 2022.2024.
WaveDancer, Inc. | Form 10-Q September 30, |
The Company previously had a revolving line of credit with another bank (“prior LOC”) providing for demand or short-term borrowings of up to $1,000,000 at an interest rate of the greater of 4.0% or LIBOR +3.5%. The prior LOC originally was due to expire on July 31, 2021 and was secured by the assets of the Company. The Summit line of credit was used to pay off the prior LOC and it was closed on May 3, 2021.Premium Financing Note Payable
On April 16, 2021, weThe Company entered into a $1 millionPremium Finance Agreement (“Premium Agreement”) on March 7, 2023, to purchase a one-year term loan agreement with Summit Community Bank.directors and officers insurance policy. The term of the loan was two years with monthly installments comprising a fixed principal amount plus interest accruingPremium Agreement is for $305,759 at a fixed rate of 4.89%.8.75% per annum, amortized over ten months. The loan was collateralized by a securityPremium Agreement requires ten fixed monthly principal and interest in substantially all the assetspayments of the Company. On$31,815 from March 24, 2023 to December 30, 2021, we fully repaid the outstanding balance of the loan.
To provide additional net working capital support, the Company borrowed $150,000 from the sellers of Tellenger for a period of 90 days from the closing date of April 7, 2021, without interest accumulation. The sellers were repaid in July 2021.24, 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$15,000,000 of shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), from time to time. Sales of Common Stock to B. Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B. Riley under the Purchase Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of 1933, as amended (the “Securities Act”) the resale by B. Riley of up to 4,500,000450,000 shares of Common Stock that the Company may issue or elect, in the Company’s sole discretion, to issue and sell to B. Riley, from time to time under the Purchase Agreement. We
On August 11, 2022 and November 10, 2022, the Company issued 89,835 common shares valued at $112,500 to B. Riley 8,984 and 2,995 shares, respectively, as a commitment fee.fee in accordance with the Purchase Agreement. The costtotal value of the commitment fee shares was $150,000 and is included in prepaid expenses and other current assets on the unaudited consolidated condensed consolidated balance sheet as of December 31, 2022. The commitment fee represents prepaid stock issuance cost and will be chargedis being amortized to additional paid in capital as shares are sold under the ELOC. As ofPurchase Agreement. For the three and nine months ended September 30, 2022, 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 shares have been sold to B. Rileysales under the Purchase Agreement.Agreement during the three and nine months ended September 30, 2022.
Note 11. Private Offerings of Common Stock
During August 2022 the Company sold 1,572,506 unregistered shares of its common stock in a private offering at a price of $1.20 per share from which it raised aggregate gross proceeds of $1,887,000.
In March 2021, the Company sold 330,666 unregistered shares of its common stock in a private offering at a price of $1.50 per share from which it raised aggregate gross proceeds of $495,999.
On August 26, 2021, the Company sold 1,400,000 units at a price of $2.00 per unit, each unit consisting of one unregistered share of common stock and one warrant exercisable at $3.00 for one share of common stock, in a private offering from which it raised aggregate gross proceeds of $2,800,000. The warrants expire on August 31, 2026. 1,400,000 shares of common stock issuable upon exercise of warrants in connection with the offering have been reserved for issuance. The warrants are classified as equity.
On December 10, 2021, the Company sold 3,289,526 units at a price of $3.04 in a private offering from which it raised $10,000,000 resulting in the issuance of a like number of shares of common stock and Series A warrants exercisable for 657,933 shares of common stock. The warrants are exercisable at a price of $4.50 per share, with the warrants exercisable from January 1, 2023 through December 31, 2026. If the shares underlying the warrants are not registered when the warrants become exercisable, the warrants can be exercised on a cashless basis. The warrants are subject to mandatory exercise if, commencing January 1, 2024, the volume weighted average price per share for 10 consecutive trading days equals or exceeds $12.50. The warrants are classified as equity.
The total offering costs associated with the sales of unregistered shares of common stock in 2022 and 2021 were not material.
Note 12.Income Taxes
DuringFor the three- and nine-month periods months ended September 30, 2022, the Company’s effective tax rate was 2.2% and 13.6%, respectively.0%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate and the Company’s effective tax rate for the three- and nine-month periods ended September 30, 2022 were state taxes, changes in valuation allowance, and permanent items. A valuation allowance was recorded during the three-month period ended September 30, 2022 increasing the tax benefit by $54,592. During the three- and nine-month periods ended September 30, 2021, the Company’s effective tax rate was 0%. The primary factors contributing to the difference between the statutory tax rate and the effective tax rate for the three- and nine-month periods ended September 30, 2021, is primarily driven by the presence of a full valuation allowance inagainst all jurisdictions.deferred tax assets.
Note 13.12. (Loss) IncomeEarnings Per Share
Basic lossearnings (loss) per share excludes dilution and is computed by dividing the loss available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings (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 437,35223,104 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 ninemonths ended September 30, 2022and the, respectively. The antidilutive effecteffects of 570,09043,735 shares from stock options and 150,000zero 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. 2022The dilutive effect of outstanding options and warrants is reflected in earnings per share by use of the treasury stock method. The antidilutive effect of 672,373 shares were excluded from diluted shares for the three months ended September 30, 2021., respectively.
The following is a reconciliation of the amounts used in calculating basic and diluted net (loss) income per common share:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net (loss) income | $ | (4,700,519 | ) | $ | (95,527 | ) | $ | (8,304,268 | ) | $ | 218,445 | |||||
Basic weighted average shares outstanding | 18,382,131 | 12,596,126 | 17,688,528 | 11,957,878 | ||||||||||||
Dilutive effect of warrants and/or options | - | - | - | 627,036 | ||||||||||||
Diluted weighted average shares outstanding | 18,382,131 | 12,596,126 | 17,688,528 | 12,584,914 | ||||||||||||
Basic (loss)/earnings per share | $ | (0.26 | ) | $ | (0.01 | ) | $ | (0.47 | ) | $ | 0.02 | |||||
Diluted (loss)/earnings per share | $ | (0.26 | ) | $ | (0.01 | ) | $ | (0.47 | ) | $ | 0.02 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements regarding our business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements. Investors should read and understand the risk factors detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 (“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 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 |
● | 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 20212022 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Our Business
Founded in 1979 as 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 developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.
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 as an equity method investment. 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 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 and government 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 General 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-ownedwholly owned subsidiary of the Company, we acquired competencies in web-based solutions and 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 growth in the cybersecurity market.
In December 2021, we announced the reorganization of our entire professional services practice into Tellenger, and as a result, our professional services are contained in a single entity. Through Tellenger, we perform services such as business process re-engineering, cloud migrations, and Software-as-a-Service (“SaaS”) implementations on behalf of clients in the private and public sector with an aim to increase productivity, gain efficiencies, and achieve key performance indicators. Tellenger is appraised at Capability Maturity Model Integration (CMMI) Level 3.
WaveDancer, Inc. | Form 10-Q September 30, |
Through our acquisition of Gray Matters, Inc. and in connection with our business transformation strategy which we discuss below, in December 2021 we gained access to blockchain and encryption algorithm technology. Gray Matters specializes in the supply chain management (“SCM”) industry and in United States intelligence, national security and diplomatic organizations. Gray Matters uses a “Zero Trust” product and is designed to secure and monitor the lifecycle of manufacturing through destruction and recycling.
Our Strategy
Our strategy is to grow our business organically as well as through acquisitions.
Through the acquisitionsacquisition of Tellenger, and Gray MattersInc. in 2021, we began to reposition our legacy professional services business by allocating resources away from third-party product reselling and toward professional services, which management viewed as higher margin, including within the SCM sector. In assessing the Company’s repositioning, management observed cybersecurity practices as evolving toward a zero-trust approach, the integration of blockchain as enhancing SCM, and the proliferation of Internet of Things (“IoT”) devices that were taking organizational networks to the edge. Additionally, we have been seeking to purchase other technology companies whose businesses complement the Company’s existing business and whose personnel would better enable us to compete for engagements in our focus areas.
margin. To grow organically, we have hired and plan to continue to hire, business development personnel and intend to become more proactive inare focused on bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.
As discussed below under ‘Liquidity and Capital Resources’, the 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 the Company. Any such transaction, if consummated, could fundamentally alter the Company’s business.
Results of Continuing Operations – Three Months Ended September 30, 20222023 and 20212022
Revenue
Total revenue was $2,306,379$1,967,277 for the three months ended September 30, 2022,2023, compared with $4,299,925$2,306,379 in the prior year quarter, a decrease of $1,993,546,$339,102, or 46.4%14.7%. All of the decrease is from our Tellenger segment since we did not recognize revenue for Blockchain SCM this quarter and did not have the segment last year.
Tellenger
The decrease in revenue was driven by our de-emphasis of $1,993,546 consists of lower professional services revenue totaling $684,093 and lower third-party software sales which accounted for just 2.3% of $1,309,453.our sales in the third quarter of 2023 as compared to 8.3% in the prior year quarter. Professional services revenue decreased by $192,712, or 9.1%, to $1,921,300 in the third quarter of 2023 from $2,114,012 in the third quarter of 2022. The decline in professional services revenue is driven primarily by one software modernization project where we had deployed morefewer resources and billed more overtime, in 2021 in order to achieve a particular milestone whereasdeployed in the third quarter of 2022 we had fewer resources and less overtime from those resources. The reduction in sales of third-party software is2023 as compared to the result of our decision to de-emphasize these sales since they generate gross margins in the low single digits.comparable prior year quarter based on current project deliverables.
Gross Profit
Gross profit decreased by $497,253$88,784 or 50.8%12.0%, to $481,622$649,812 for the three months ended September 30, 20222023 as compared to $978,875$738,596 in the prior year quarter.
Tellenger
The decrease in gross profit includes a decreasean increase from professional services of 317,261, partially offset by an increase in margin on$5,533 and a decrease from third-party software sales of $78,068. The reduced margin on professional$94,317. Professional services is driven by the reduced revenues discussed abovegross profit as well asa percent of revenue declined from 37.5% to 35.8% due to a change in the mix of contracts generating revenue and the related billing rates resulting in a reductionas well as increases in our gross profitcosts of labor that outpaced billing rate to 30.7% from 34.5%.
Blockchain SCM
We recorded a negative gross profit of $258,060 in our Blockchain SCM operating segment. As noted above, we experienced delays in receiving approval from our government customer of certain milestone achievements specified in our contract with that customer. However, we continued to incur costs supporting the contract resulting in negative gross profit.increases.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses have increased significantly since the second half of 2021 when we began to implement our transformative strategy described in the Our Strategy section above and in our Annual Report. The following table shows the major elements of SG&A expenses for the three months ended September 30, 2023 and 2022 and 2021 and the increaseschanges between periods:
Three Months Ended September 30, | ||||||||||||
2022 | 2021 | Increase | ||||||||||
Personnel costs | $ | 1,076,928 | $ | 572,588 | $ | 504,340 | ||||||
Legal and professional fees | 445,163 | 142,766 | 302,397 | |||||||||
Intangibles amortization | 349,893 | 44,061 | 305,832 | |||||||||
Stock-based compensation | 614,094 | 80,882 | 533,212 | |||||||||
Governance and investor relations | 97,800 | 64,153 | 33,647 | |||||||||
IT and office expenses | 44,814 | 30,017 | 14,797 | |||||||||
Marketing expenses | 68,122 | 7,001 | 61,121 | |||||||||
All other | 229,429 | 82,429 | 147,000 | |||||||||
$ | 2,926,243 | $ | 1,023,897 | $ | 1,902,346 |
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 | ) |
Acquisition CostsOperating Income from Continuing Operations
We incurred acquisition expenses totaling $38,617Our operating loss from continuing operations was $516,845 in the three months ended September 30, 2022third quarter of 2023 as compared to $39,245a loss of $1,130,118 in the corresponding quarter in 2021. These expenses include fees for legal, tax and audit professional services as well as other costs to conduct due diligence and finalize a transaction.
Goodwill Impairment
During the third quarter2022, an improvement of 2022, our Gray Matters reporting unit, which is in our Blockchain SCM segment, experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, results in a decline$613,273, or 54.3%. The decrease in the reporting unit’s estimated future cash flows. Accordingly, we performed an interim goodwill impairment test in accordance with the amended goodwill guidance for this reporting unit prior to our annual impairment test.
As a result of the test, the estimated fair value of this reporting unit was determined to be lower than the carrying value and we recorded a non-cash charge of $2,254,624 to impair the carrying value of this reporting unit’s goodwill.
(Loss) Income from Operations
Loss from operations was $4,737,862 in the third quarter of 2022 compared to aoperating loss from operations of $84,267 in the corresponding quarter in 2021, an increase in the loss of $4,653,595. The increase in the loss fromcontinuing operations is primarily the result of the decrease in gross profit of $497,253 and the increase in SG&A expenses of $1,902,346, all$702,057, as discussedshown above, and approximately $3.3 millionpartially offset by the decrease in gross profit of the increased loss is attributable to the Blockchain SCM operating segment that was acquired with GMI in December 2021.$88,784.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Results of Discontinued Operations – Three Months Ended September 30, 2023 and 2022
The sale of GMI to GMDC occurred on March 17, 2023, and as a result, there was no activity for GMI in the 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 Months Ended September 30, 20222023 and 20212022
Revenue
Total revenue was $9,619,273$6,152,022 for the nine months ended September 30, 2022,2023, compared with $9,052,411 in the corresponding prior year period, a decrease of $2,900,389, or 32.0%. The decrease in revenue was driven primarily by our de-emphasis of third-party software sales which accounted for just 2.6% of our sales in the nine months ended September 30, 2023, as compared to $12,451,46728.7% in the comparable periodnine 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 2021, a decreasethe corresponding nine months of $2,832,194, or 22.7%.2022. The decrease includes $3,399,057 from the Tellenger operating segment, partially offset by the $566,862 of year-to-date revenue from the Blockchain SCM operating segment for which there is no prior year amount since this operating segment is the GMI business acquired in December 2021.
Tellenger
The $3,399,057 revenue decrease comprises a decreasedecline in professional services revenue of $2,107,105arose after the first quarter and a decrease in third-partyis driven primarily by one software sales of $1,291,951. The professional services revenue decrease includes three primary declining items: 1) one contract for which much of 2021 included a greater number ofmodernization project where we had fewer resources deployed in the second and more overtime billed in connection with meeting an accelerated milestonethird quarters of 2023 as compared to 2022 when we have not had as many resources deployed nor overtime billed ($1,635 thousand); 2) one contract that has transitioned to a maintenance phase where in 2021 we had revenues associated with systems conversion ($335 thousand); and 3) one contract that ended in 2021 ($563 thousand). These declining items were partially offset by increased revenues from having a full nine months of the Tellenger, Inc. acquisition in 2022 versus just over 6 months in 2021 ($421 thousand). The reduction in sales of third-party software is the result of our decision to de-emphasize these sales since they generate gross margins in the low single digits.comparable prior year quarters based on current project deliverables.
Gross Profit
Gross profit was $1,787,468decreased by $327,284 or 14.0%, to $2,011,623 for the nine months ended September 30, 2022,2023, as compared to $2,954,453$2,338,907 in the comparable period in 2021, a decrease of $1,166,985 or 39.5%.prior year. The decrease includes $615,545 from the Tellenger operating segment and $551,440 of year-to-date negative gross margin from the Blockchain SCM operating segment for which there is no prior year amount since this operating segment is the GMI business acquired in December 2021.
Tellenger
The $615,545 gross profit decrease comprises a decrease in gross profit includes a decrease from professional services of $692,062, partially offset by increased gross profit$161,513 and from third-party software sales of $76,517. The decline in$165,771. Professional services gross profit as a percent of revenue declined slightly from professional services includes two33.7% to 33.6% due primary declining items: 1) one contract for which muchto changes in the mix of 2021 included a greater number of resources deployedcontracts generating revenue and more overtime billed in connection with meeting an accelerated milestone as compared to 2022 when we have not had as many resources deployed nor overtime billed ($706 thousand); and 2) one contract that has transitioned to a maintenance phase where in 2021 we had revenues associated with systems conversion ($209 thousand). These declining items were partially offset by increased gross profit from having a full nine months of the Tellenger acquisition in 2022 versus just over three months in 2021 ($269 thousand).related billing rates.
WaveDancer, Inc. | Form 10-Q September 30, |
Selling, General and Administrative Expenses
SG&A expenses have increased significantly since the second half of 2021 when we began to implement our transformative strategy described in the Our Strategy section above and in our Annual Report. The following table shows the major elements of SG&A expenses for the nine months ended September 30, 2023 and 2022 and 2021 and the increaseschanges between periods:
Nine Months Ended September 30, | ||||||||||||
2022 | 2021 | Increase | ||||||||||
Personnel costs | $ | 3,383,189 | $ | 1,477,112 | $ | 1,906,077 | ||||||
Legal and professional fees | 1,511,578 | 236,110 | 1,275,468 | |||||||||
Intangibles amortization | 1,049,679 | 87,912 | 961,767 | |||||||||
Stock-based compensation | 1,455,835 | 220,455 | 1,235,380 | |||||||||
Governance and investor relations | 376,904 | 156,698 | 220,206 | |||||||||
IT and office expenses | 190,551 | 76,682 | 113,869 | |||||||||
Marketing expenses | 224,910 | 16,877 | 208,033 | |||||||||
All other | 688,327 | 251,494 | 436,833 | |||||||||
$ | 8,880,973 | $ | 2,523,340 | $ | 6,357,633 |
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 | ) |
Acquisition CostsOperating Loss from Continuing Operations
We incurred acquisition expenses totaling $829,478Our operating loss from continuing operations was $978,459 for the nine months ended September 30, 20222023 as compared to $192,530$4,406,450 for the nine months ended September 30, 2021. The current year's expenses were incurred primarily in connection with the terminated acquisition of Knowmadics. These expenses include fees for legal, tax and audit professional services as well as other costs to conduct due diligence and finalizecomparable prior year period, a transaction.
Change in Fair Value of Contingent Consideration
Under the terms of the Gray Matters purchase agreement, the Seller is eligible to receive up to $4,000,000 of additional consideration, payable in cash, based on the amounts of revenue and gross profit achieved by GMI during the period from the acquisition date through December 31, 2022. In the purchase accounting for GMIdecrease in the fourth quarterloss of 2021, we recorded a contingent liability of $930,000 based on our estimate for GMI’s expected performance for 2022. Since that initial estimate there have been delays$3,427,991 or 77.8%. The decrease in the timing of realizing revenue that have pushed a material amount ofoperating loss from continuing operations is primarily the projected revenue and related gross profit outside of the one-year measurement period of the Seller’s earnout provision. As of September 30, 2022 we estimated that the contingent consideration was no longer probable of being realized by the seller and removed the contingent consideration liability. The result of writing down the contingent liability has been the recognition of non-cash operating income of $930,000 as discussed in Note 5.
Goodwill Impairment
During the third quarter of 2022, our Gray Matters reporting unit, which is the same as our Blockchain SCM operating segment, experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, resulted in a decline in the reporting unit’s estimated future cash flows. Accordingly, we performed an interim goodwill impairment test as of September 30, 2022.
As a result of the test,gain on litigation settlement of $1,442,468 along with the estimated fair value of this reporting unit was determined to be lower than the carrying value and we recorded a non-cash charge of $2,254,624 to impair the carrying value of this reporting unit’s goodwill.
(Loss) Income from Operations
Loss from operations was $9,247,607 for the nine months ended September 30, 2022 compared to income from operations of $238,583 for the nine months ended September 30, 2021, a decrease of $9,486,190. The decrease in income from operations is the resultSG&A expenses of $2,312,807, as shown above, partially offset by the decrease in gross profit of $1,166,985$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 increase in SG&A expenses and acquisition costs totaling $6,994,581, and the goodwill impairmentfirst quarter of $2,254,624, partially offset by the income from the change in fair value of contingent consideration recorded in connection with the Gray Matters acquisition of $930,000, all2023 as discussed above. Approximately $4.1 million of the decrease in income from operations is attributablecompared to the Blockchain SCM operating segment that was acquired with GMI in December 2021.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 EstimateEstimates
Our accounting policies are described in Note 1 of our consolidated financial statements – Organization and Summary of Significant Accounting Policies. We prepare ourOur condensed consolidated financial statements and the accompanying notes thereto included elsewhere in conformitythis Quarterly Report on Form 10-Q are prepared in accordance with US GAAP, which requireU.S. GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesrevenue, costs and expenses, duringand related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the year.circumstances. Actual results could differ significantly from thoseour estimates. We considerTo the following policiesextent that there are differences between our estimates and estimates to be most critical in understanding the judgments involved in preparingactual results, our future financial statements for the three and nine months ended September 30, 2022 and the uncertainties that could affect ourstatement presentation, financial condition, results of operations, financial condition and cash flows.flows will be affected.
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 except for two new fair value measures for the first quarter of 2023:
Goodwill Impairment Testing
As1) the determination of the fair value of the contingent consideration receivable from GMDC, as discussed in NoteNotes 2 and 5 to our interimthe accompanying consolidated financial statements, duringand
2) the third quarter of 2022, our Gray Matters reporting unit experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, results in a decline in the reporting unit’s estimated future cash flows. Accordingly, we performed an interim goodwill impairment test as of September 30, 2022. As a resultdetermination of the test, the estimated fair value of this reporting unit was determined to be lower than the carrying value and we recorded a non-cash charge of $2,254,624 to impair the carrying value of the Gray Matters reporting unit goodwill.
We believe that the Gray Matters reporting unit may be at risk of failing future quantitative impairment tests if it continues to experience declining estimated future cash flows. Impairment charges are non-cash in nature and, as with current impairment charges, any future impairment charges will not impact our cash needs or liquidity. The key assumptions in the September 30, 2022 goodwill impairment test for the Gray Matters reporting unit are as follows: the unit is expected to begin generating positive cash flows within the next several years, a discount rate of 22.5%, and a terminal cash flow growth rate of 3%.
The estimatedinitial fair value of our Tellengerequity method investment in GMDC as of March 17, 2023.
The determination of the fair value of the contingent consideration is a recurring fair value measure at the end of each reporting unit significantly exceeded its carryingperiod and includes 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 September 30, 2022.March 31, 2023 and, accordingly, changes in assumptions could have a material impact on the increase 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 through March 31, 2023, GMDC raised $3,000,000 by issuing Series A preferred shares at $1.00 per share representing 57.2 percent of the fully diluted capitalization. The Series A transaction was considered by the Company to be the most reliable indication of the fair value of total equity of GMDC. We utilized an option pricing model backsolve method (“OPM Backsolve”) to solve for the total equity value that results in a value of Series A equal to its issuance price, and to estimate the fair value of common shares. The significant inputs utilized in the OPM 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, 2022,2023, the Company had a net working capital of approximately $1.3 million,$537,375, including cash and cash equivalents of $1.5 million, generated operating losses in 2022$877,198 and at$500,000 outstanding under its line of credit with Summit bank. For the nine months ended September 30, 2022 had an accumulated deficit2023, we generated a net loss from continuing operations of $21.7 million.$929,106. As discussed below, our ability to generate sufficient cash flows to meet our obligations for the twelve months following the issuance of these financial statements is dependent upon factors which are sufficiently outside of management’s control as to castcontrol. Accordingly, there is substantial doubt about our ability to continue as a going concern.
BeginningThe Company will need to raise additional capital to grow its business either organically or through acquisition. The Company is also pursuing strategic alternatives which include the potential merger or sale of the Company. There is no assurance that our efforts will result in August 2021 we embarked onany transactions or provide additional capital, which creates substantial doubt about the Company’s ability to continue as a transformative strategy to repositiongoing concern for at least one year from the date that the accompanying financial statements are issued. We estimate that within twelve months from the date of issuing these financial statements, the Company as a leader in the Zero-Trust, blockchain and Secure Supply Chain marketplace. In December 2021 we acquired Gray Matters, Inc. (“GMI”) whose blockchain and encryption algorithm technology was built to solve real-world problems through purpose-built innovation in secure Supply Chain Management (SCM) in United States government organizations. After closing on the GMI acquisition, we focused on the second of our two intended foundational acquisitions, Knowmadics, Inc. (“KMI”), a leading Internet of Things (IoT) remote device management and monitoring platform company. After announcing a definitive agreement in March of 2022, we terminated the agreement on June 6, 2022 due to our inabilitywill need to raise the funds requiredadditional capital to complete the deal undermeet its original terms. Beginning in late 2021 and through the third quarter of 2022 we have hired salespeople, marketers, and software engineers, developed and implemented sales and marketing programs, and expanded our compliance, governance, and administrative infrastructure to support our long-term strategy. At the same time, we have experienced delays in the adoption of our SCM platform by our primary government customer. The result has been a sharp increase in operating expenses, without growth in revenue and gross margins, and negativeongoing operating cash flows. In August 2022 we sold 1,572,506 unregistered shares of our common stock in a private offering at a price of $1.20 per share from which we raised aggregate gross proceeds of $1,887,000.flow requirements.
We intend to continue to invest in our SCM platform and to execute our strategy to become a leading zero trust, blockchain-enabled cybersecurity company and believe strongly in the long-term viability of our strategy. We do not have any material contractual obligations or capital expenditures that we are committed to expend over the next 12 months related to these or other activities. We have no outstanding debt that we are required to repay over the next 12 months and have no off-balance-sheet arrangements that are likely to have a material future effect on our financial condition, or changes in financial condition, liquidity or capital resources or expenditures. We used cash from operating activitiescontinuing operations of approximately $5 million through$2,020,330 during the first 9nine months of 2022ended September 30, 2023 and anticipate that over the twelve months from the date of these financial statements our operating activities may use in excess of that amount over the next 12 months, including satisfying our current liabilities of approximately $2.1as much as $1.0 million as of September 30, 2022 and our other typical operating expenses, including payroll for our workforce and other costs. We may also pursue growth in revenue and profitability via acquisition or merger and we plan to implement measures to reduce our operating expense cost structure. We may consider asset sales and other actions to reshape our business.$1.5 million.
However,On August 9, 2023, the Company will require additional capitalreceived $1,400,000 of cash from GMDC from: 1) the sale of the common stock of GMDC held by the Company; and, 2) in satisfaction of the contingent consideration receivable due from GMDC to support its strategy. Other sources of liquidity include our bankthe Company. On August 9, 2023, the Company repaid $500,000 on the Summit line of credit which had $1 million of availability as of September 30, 2022, as well as the Common Stock Purchase Agreement we entered into with B. Riley Principal Capital II, LLC on July 8, 2022 (the “ELOC”), which will enable us to raise additional capital under an equityand has no further borrowing capacity thereunder. The line of credit. However, the amount ofcredit expires on January 16, 2024. The Company has no commitments for capital we can raise under the ELOC is a function of our trading volume and the market price of our common shares. Without an increase in our recent share price and trading volumes, we do not anticipate that the ELOC will be able to meaningfully support ourspending nor any plans for material capital needs. There can be no assurance that additional capital will be available on terms acceptable to us, or at all.expenditures.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and people performing similar functions, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 20222023 (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, 2022,2023, 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, |
Item 1.Legal Proceedings
Item 1. | Legal Proceedings |
None.
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, 2021,2022, 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, 2021.2022.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
From August 11 through August 16, 2022, the Company sold 1,572,506 shares of common stock at a price of $1.20 per share in a private placement offering from which it raised aggregate gross proceeds of $1,887,000. The Company relied upon Rule 506(b) of Regulation D in issuing these shares. No placement fees or commissions were paid in connection with the offering. The proceeds are for use for general corporate purposes.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
Unregistered Sales of Equity Securities and Use of Proceeds | |
On September 27, 2023, the Company sold 35,000 shares of common stock at a price of $5.00 per share in a private placement offering from which it raised aggregate gross proceeds of $175,000. The Company relied upon Rule 506(b) of Regulation D in issuing these shares. No placement fees or commissions were paid in connection with the offering. The proceeds are for use for general corporate purposes. |
Defaults Upon Senior Securities | |
None. |
Mine Safety Disclosures | |
Not applicable |
Other Information | |
None. |
WaveDancer, Inc. | Form 10-Q September 30, |
|
| ||
|
|
| |
31.1 | Filed with this Form 10-Q | ||
31.2 | Filed with this Form 10-Q | ||
32.1 | Filed with this Form 10-Q | ||
32.2 | Filed with this Form 10-Q | ||
101.INS | Inline XBRL Instance Document | Filed with this Form 10-Q | |
101.SCH | Inline XBRL Taxonomy Extension Schema | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
WaveDancer, Inc. | Form 10-Q September 30, |
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 | By: | /s/ G. James Benoit, Jr. | ||||
G. James Benoit, | |||||||
Chief Executive Officer | |||||||
Date: | November | By: | /s/ Timothy G. Hannon | ||||
Timothy G. Hannon, | |||||||
Chief Financial Officer |