ThereThe condensed consolidated financial statements as of September 30, 2022, and for the three- and nine-month periods ended September 30, 2022 include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we” or “our”). All significant intercompany transactions and balances have been eliminated in consolidation.
Other than 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 below, there have been no changes in the Company’s significant accounting policies as of September 30, 2017 2022, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 that was filed with the SEC on March 31, 2017.Report.
8
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Use of Estimates and Assumptions
The preparationPreparation of condensed consolidated financial statements in accordanceconformity with GAAP requires managementus to make estimates and assumptions that affect certainthe 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. 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; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, 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:
| ● | Preliminary project stage: (a) conceptual formulation of alternatives; (b) evaluation of alternatives; (c) determination of existence of needed technology; and (d) final selection of alternatives. Internal and external costs incurred during the preliminary project stage are expensed as incurred. |
| ● | Application development stage: (a) design of chosen path, including software configuration and software interfaces; (b) coding; (c) installation to hardware; and (d) testing, including parallel processing phase. Internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized. |
| ● | Post-implementation-operation stage: (a) training; and (b) application maintenance. Internal and external costs incurred during the post-implementation-operation stage are expensed as incurred. |
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.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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 disclosureare 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 contingent assetsmore likely than not, and liabilities at the date ofa 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 statementsstatements. 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 reported amountsInflation 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, 2022, the Company’s prime contracts with U.S. government agencies represented 11.4% of revenue, subcontracts under federal procurements represented 82.8% of revenue, and expenses5.8% of revenue came from commercial and local government contracts. 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 three months ended September 30, 2021, the Company’s prime contracts with U.S. government agencies represented 37.0% of revenue and subcontracts under federal procurements represented 62.9% of revenue, and 0.2% of revenue came from commercial and local government contracts. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 32.5%, 11.4%, and 10.6% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 45.8% 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 32.8% of revenue, subcontracts under federal procurements represented 63.8% of revenue, and 3.3% of revenue came from commercial and local government contracts. One prime contract with a U.S. government agency represented 11.1% of revenue, and two subcontracts under federal procurements represented 25.8%, and 15.6% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 38.9% of the Company’s revenue in aggregate.
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% and 34.8% of total revenue during the reporting period. Actual results can, three months ended September 30, 2022 and in many cases will, differ from those estimates.
Income Taxes
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, 2017, there2022, 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 of September 30, 2021, receivables from one prime contractor under which the Company has multiple subcontracts represented 63.7% of the Company’s outstanding accounts receivable in aggregate.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Note 2.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.
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 been no material changespassed to the Company’s uncertain tax position disclosurescustomer as providedthe work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in Note 7time when delivery of units has occurred and units are accepted by the Annual Report. The Company does not anticipate that total unrecognized tax benefits will significantly change priorcustomer or are reasonably expected to September 30, 2018.
The Company earnsbe accepted. Generally, revenue from both professional servicesunder fixed-price arrangements and salesmixed arrangements is recognized either over time or at a point in time based on the allocation of software and related support. Thetransaction pricing to each identified performance obligation as control of each is transferred to the customer. For fixed-price arrangements under which documentary evidence of acceptance or receipt of deliverables is not present or withheld by the customer, the Company recognizes revenue when a contractit has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability ofright to invoice the contract price is considered probable and can be reasonably estimated. Revenue from professional services is earned under time and materials and fixed-price contracts. For sales of third-party software products, revenue is recognized upon product delivery, with any maintenance related revenues recognized ratably over the maintenance period.
Revenue on time and materials contracts is recognized based on direct labor hours expended at contract billing rates and adding other billable direct costs.
customer. For fixed-price contracts that are based on unit pricing, the Company recognizes revenuearrangements for the number of units delivered in any given reporting period.
For fixed-price contracts in which the Company is paid a
specific amountfixed fee to
bemake itself available to
providesupport a
particular service for a stated period of time,customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over
time.Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the service period.type of customer and whether the licenses are bulk licenses or individual licenses. The Company applies this methodCompany’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of revenue recognitionthe full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to renewalsimplementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of maintenance contractsthe administrative portal. Revenue for bulk desktop software licenses for non-government customers is usually recognized on third-partya gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. For desktop software sales andlicenses sold on an individual license basis to separable maintenance elements of sales of third-party software that include fixed terms of maintenance, such as Adobe and Micro Focus software, for whichnon-government customers, where the Company is responsible for “first line support”has no obligation to the customer after the third-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for servingthe net of the selling price and its contract costs.
Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.
Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a liaisoncustomer, but the sale occurs directly between the customer and the third-party maintenance provider for issuessupplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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 | % |
| | | Nine months ended September 30, | |
| | | 2022 | | | 2021 | |
Contract Type | | Amount | | | Percentage | | | Amount | | | Percentage | |
Services time & materials | | $ | 5,963,361 | | | | 62.0 | % | | $ | 7,519,190 | | | | 60.4 | % |
Services fixed price over time | | | 161,273 | | | | 1.7 | % | | | 452,726 | | | | 3.6 | % |
Firm fixed price | | | 566,862 | | | | 5.9 | % | | | - | | | | - | |
Services combination | | | 80,520 | | | | 0.8 | % | | | 506,331 | | | | 4.1 | % |
Services fixed price per unit | | | 253,379 | | | | 2.6 | % | | | 87,391 | | | | 0.7 | % |
Third-party software | | | 2,345,884 | | | | 24.4 | % | | | 3,683,967 | | | | 29.6 | % |
Software support & maintenance | | | 142,891 | | | | 1.5 | % | | | 150,696 | | | | 1.2 | % |
Incentive payments | | | 105,103 | | | | 1.1 | % | | | 51,166 | | | | 0.4 | % |
Total revenue | | $ | 9,619,273 | | | | 100.0 | % | | $ | 12,451,467 | | | | 100.0 | % |
Contract Balances
Accounts Receivable
Trade accounts receivable are recorded at the billable amount where the Company is unablehas the unconditional right to resolve.
bill, net of allowances for doubtful accounts. The
Company reports revenue on both gross and net bases on a transaction by transaction analysis using authoritative guidance issued by the Financial Accounting Standards Board (the “FASB”). The Company considers the following factors to determine the gross versus net presentation: if the Company (i) acts as principal in the transaction; (ii) takes title to the products; (iii) has risks and rewards of ownership, such as the risk of lossallowance for
collection, delivery or return; and (iv) acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis. Generally, sales of third-party software products such as Adobe and Micro Focus products are reported on a gross basis with the Company acting as the principal in these arrangements. This determinationdoubtful accounts is based on the
Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized as of September 30, 2022 and December 31, 2021.Accounts receivable as of September 30, 2022 and December 31, 2021, consist of the following: 1)
| | | September 30, 2022 | | | December 31, 2021 | |
Billed federal government | | $ | 1,491,705 | | | $ | 1,594,473 | |
Billed commercial | | | 40,469 | | | | - | |
Unbilled receivables | | | - | | | | 70,389 | |
Accounts receivable | | $ | 1,532,174 | | | $ | 1,664,862 | |
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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 inventory riskthe right to bill, but that have not been recognized as suppliersrevenue because the related goods or services have not been transferred. Changes in contracts liabilities balances in the three months and nine months ended September 30, 2022 and 2021, are not obligatedas follows:
Balance as of December 31, 2021 | | $ | 186,835 | |
Contract liabilities added | | | 19,280 | |
Revenue recognized | | | (56,423 | ) |
Balance as of March 31, 2022 | | | 149,692 | |
Contract liabilities added | | | 87,612 | |
Revenue recognized | | | (71,461 | ) |
Balance as of June 30, 2022 | | | 165,843 | |
Contract liabilities added | | | 2,491 | |
Revenue recognized | | | (130,648 | ) |
Balance as of September 30, 2022 | | $ | 37,686 | |
Balance as of December 31, 2020 | | $ | 946,884 | |
Contract liabilities added | | | 93,934 | |
Revenue recognized | | | (585,322 | ) |
Balance as of March 31, 2021 | | | 455,496 | |
Contract liabilities added | | | 4,815 | |
Revenue recognized | | | (354,427 | ) |
Balance as of June 30, 2021 | | | 105,884 | |
Contract liabilities added | | | 79,640 | |
Revenue recognized | | | (107,479 | ) |
Balance as of September 30, 2021 | | $ | 78,045 | |
Revenues recognized during the three months ended September 30, 2022 and 2021, from the balances as of December 31, 2021 and 2020, were $48,708 and $58,556, respectively. Revenues recognized during the nine months ended September 30, 2022 and 2021, from the balances as of December 31, 2021 and 2020, were $160,809 and $946,884, respectively.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Costs to accept returns, 2)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. Changes in deferred costs of revenue balances in the three 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
SCM | | | Corporate | | | Consolidated | | | | Tellenger | | Blockchain
SCM | | | 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 |
Note 4.Leases
The Company has reasonable latitude, within economic constraints,two significant operating leases, one for its headquarters offices in establishing price, 3) Fairfax, Virginia and one for additional office space in Annapolis, Maryland. The leases both commenced in 2021 and have original lease terms ranging from 37 to 67 months and rental rates escalate by approximately 2.5% annually under both leases. The Company determines if an arrangement is a lease at inception. 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 and December 31, 2021, the Company indoes not have any sales-type or direct financing leases.
The Company’s operating lease asset represents its marketing efforts, frequently aidsright to use an underlying asset for the customerlease term and lease liabilities 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 does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining product specifications, 4) the Company has physical losspresent value of lease payments. The operating lease asset also includes any lease payments made and inventory risk as title transfers at the shipping point, 5) the Company bears full credit risk, and 6) the amount the Company earns in the transaction is neither a fixed dollar amount nor a fixed percentage. Generally, revenue derivedexcludes lease incentives. Lease expense for facilitating a sales transaction of Adobe products in which a customer introduced by the Company makes a purchase directly from the Company’s supplier or another designated resellerlease payments is recognized on a netstraight-line basis whenover the commission payment is received since the Company is merely acting as an agent in these arrangements. Since the Company is notlease term. The Company’s lease agreement includes rental payments escalating annually for inflation at a direct partyfixed rate. These payments are included in the sales transaction, payment by the supplier is the Company’s confirmation that the sale occurred.
For software and software-related multiple element arrangements, the Company must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionalityinitial measurement of the
delivered productsoperating lease liability and
services; (3) determineoperating lease asset. 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.| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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, our two operating leases had a weighted average remaining lease term of 37 months and a weighted average discount rate of 5.0%. Future lease payments under operating leases as of September 30, 2022, were as follows:
Remainder of 2022 | | $ | 56,639 | |
2023 | | | 228,862 | |
2024 | | | 174,721 | |
2025 | | | 74,804 | |
2026 | | | 70,220 | |
Total lease payments | | | 605,246 | |
Less: discount | | | (48,418 | ) |
Present value of lease liabilities | | $ | 556,828 | |
The total expense incurred related to its operating leases was $53,560 and $15,985 for the three months ended September 30, 2022 and 2021, respectively, and $164,280 and $68,229 for the nine months ended September 30, 2022 and 2021, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.
Note 5.Fair Value Measurements
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the firsttwo are considered observable and the last unobservable, that may be used to measure fair value which are the following:
| • | Level 1—Quoted prices in active markets for identical assets or liabilities; |
| • | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
| • | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table represents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of each undelivered element using vendor-specific objective evidence ("VSOE"), September 30, 2022 and (4) allocateDecember 31, 2021:
| | | September 30, 2022 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 980,112 | | | $ | - | | | $ | - | | | $ | 980,112 | |
| | | December 31, 2021 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 1,600,663 | | | $ | - | | | $ | - | | | $ | 1,660,663 | |
Other liabilities: | | | | | | | | | | | | | | | | |
Fair value of contingent consideration | | $ | - | | | $ | - | | | $ | 930,000 | | | $ | 930,000 | |
See Note 6 below for an explanation of the total price among the various elements. Changesdecrease in assumptions or judgments or changesfair value of contingent consideration related to the elementsacquisition of Gray Matters, Inc.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
The following table is a roll-forward of the Level 3 fair value measurements.
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 | | $ | - | |
There were no unrealized gains or losses included in income for the three or nine months ended September 30, 2022.
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 software arrangement could cause a material increase or decreasedecline in the amountreporting 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 that 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 reports in a particular period.
The Company determines VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. The Company has established VSOE for its third-party software maintenance and support services.
The Company’s contracts with agenciespurchased 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. federal government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract, ratably throughout the contract as the services are provided, or subject to funds made available incrementally by legislators. In evaluating the probability of funding for purposes of assessing collectability of the contract price, the Company considers its previous experiences with its customers, communications with its customers regarding funding status, and the Company’s knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is deemed probable.
Payments received in advance of services performed are recorded and reported as deferred revenue. Services performed prior to invoicing customers are recorded as unbilled accounts receivable and are presented on the Company’s balance sheets in the aggregate with accounts receivable.
Prompt payment discounts taken and expected to be taken by customers in conjunction with orders received under the Company’s General Services Administration Multiple Award Schedule (“GSA Schedule”) are reflectedagencies, either as a reduction in the Company’s revenue.
2.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB,prime contractor or other standard setting bodies, that thesub-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 adoptscommon shares valued at $200,000 as of the specified effectivetransaction closing date.
In May 2014, The value of the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (“ASU 2014-09”). In subsequent ASU’s,shares was determined by the FASB issued ASU 2015-14 “Revenue from Contracts with Customers: Topic 606”, ASU 2016-08 "Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), ASU 2016-10 "Identifying Performance Obligations and Licensing", ASU 2016-12 "Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients", and ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (collectively “Topic 606”) to amend and clarify ASU 2014-09. This new set of standards will supersede nearly all existing revenue recognition guidance in GAAP. The core principle of Topic 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount it expects to receive for those goods and services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transactionclosing price and allocating the transaction price to each separate performance obligation. The standard allows entities to apply either of two adoption methods: (a) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within Topic 606 (“Retrospective Transition;” or (b) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per Topic 606. The effective date for Topic 606 is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
We will adopt the requirements of Topic 606 effective January 1, 2018, most likely using the Retrospective Transition method, whereby Topic 606 will be applied to the prior year as presented with the use of certain applicable practical expedients, and any effects on periods preceding the periods reported will appear as an adjustment to retained earnings as of the
beginningtransaction date. Goodwill is attributable to human capital related intangible assets like the value of the
earliest period reported. Asacquired 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
ASU supersedes substantiallyintangible 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
Lives
(years) | | | 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, 2022 |
Gray Matters, Inc.
On December 10, 2021, the Company purchased all existing revenue guidance affecting us under current GAAP, itthe 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 impactbe 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 cost recognition acrossgross profit. Under the whole of our business, as well as our business processes and our information technology systems.
We began our evaluationterms of the impactpurchase agreement, the Seller is eligible to receive from zero up to $4,000,000 of Topic 606additional consideration, payable in early 2017cash, based on the amounts of revenue and gross profit achieved by evaluating its impact on selected contracts of each type under which we operate. With this baseline understanding, we developed a project plan to evaluate the remainder of our contracts, develop processes and tools to dual-report financial results under both current GAAP and Topic 606, and assess the internal control structure in order to adopt Topic 606 on January 1, 2018. We have briefed our Audit Committee on our progress made towards adoption. Based on our progress to date, we anticipate being able to estimate the impacts of adopting Topic 606 on our operating resultsGMI during the fourth quarterperiod 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 2017.
We currently operate under time-and-materials, fixed-price, fixed-price-per-unit, and fixed-term third-party software license and/or third-party software maintenance contracts. Some of these contracts involve more than one type of deliverable, which adds complexity to$1,000,000 given the application of Topic 606.
Under Topic 606, revenue will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). Given the nature of our professional services and the terms and conditions in our contracts, the customer generally obtains control as we perform work under the contract. Therefore, we expect to recognize revenue over time for substantially all of our professional services contracts, while we expect to recognize revenue over time, at a point in time, or some of each for our software sales contracts, based on whathighest probability weighting. The undiscounted probability weighted outcome was sold and whether we have any continuing performance obligations, such as the obligation to provide first-line support under a maintenance contract supporting third-party software.
Under Topic 606, guidance related to principal versus agent considerations rely heavily on control of an asset before delivery over some of the considerations used under previous guidance, including the negotiation of selling price and credit risk of the seller. This will likely lead to the reclassification of a percentage of our software sales transactionsdetermined to be reported on a net sales basis, rather than on a gross sales basis, as Topic 606 guidance shifts our responsibility from a principal seller$1,000,000 and was discounted back to an agent. This reclassification will not affect the Company’s net operating results.
In February 2016, the FASB issued ASU 2016-02, “Leases: Topic 842,” which provided updated guidance on lease accounting. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that annual period, with early adoption permitted. The Company does not expect the adoption of this new standard will have a material impact on its financial statements. When adopted, the Company’s operating lease for office space will be presented as a right-of-use asset and as an offsetting liability for the present value of $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 contractual cash flows.unsecured status of the contingent consideration liability. The Company does not currently have any other material lease obligations.
In August 2016,contingent consideration liability will be remeasured at fair value at the FASB issued ASU 2016-15, “Classificationend of Certain Cash Receiptseach reporting period and Cash Payments,” to provide additional guidance and reduce diversity in practice in how certain cash receipts and cash payments are presented and classifiedreported in the statementconsolidated statements of cash flows. This guidanceoperations until the liability is effectivesettled.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 fiscal years beginning after December 15, 2017 and early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.
3.
Stock-Based Compensation
During the nine months ended
September 30, 2017,2022 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
Lives
(years) | | | 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 | | |
17
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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 two shareholder–approvedbeen 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.Intangible Assets and Goodwill
Information regarding our intangible assets is as follows:
| | | Weighted Average Useful Life (Years) | | | December 31, 2021 | | | Additions | | | September 30, 2022 | |
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 | |
Non-compete agreements | | 3.0 | | | | 120,000 | | | | - | | | | 120,000 | |
Accumulated amortization | | | | | | (201,032 | ) | | | (1,049,679 | ) | | | (1,250,711 | ) |
Sub-total | | | | | | 7,768,968 | | | | (1,049,679 | ) | | | 6,719,289 | |
Intangible assets with indefinite lives | | | | | | | | | | | | | | | |
Trade names | | Indefinite | | | | 280,000 | | | | - | | | | 280,000 | |
Net identifiable intangible assets | | | | | $ | 8,048,968 | | | $ | (1,049,679 | ) | | $ | 6,999,289 | |
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.
As of September 30, 2022, 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 | |
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Note 8.Stock-Based Compensation
We have three stock-based compensation plans. The 2006 Stock Incentive Plan was adopted in 2006 (“ (“2006 Plan”) and had options granted under it through April 12, 2016. On June 1, The 2016 the shareholders ratified the IAI 2016 Stock Incentive Plan (“was adopted in 2016 (“2016 Plan”), which and had been approved by options granted under it through November 15, 2021. On October 11, 2021, the Board of Directors on April 4, 2016.
2016approved the 2021 Stock Incentive Plan
The 2016 Plan became effective June 1, 2016, (“2021 Plan”) and expires April 4, 2026. The 2016 Plan provides foron December 2, 2021, our shareholders approved the granting of equity awards to key employees, including officers and directors. Options under the 2016 Plan are generally granted at-the-money or above, expire no later than ten years from the date of grant or within three months of when employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The number of shares subject to options available for issuance under the 2016 Plan cannot exceed 1,000,000. At September 30, 2017, there were unexpired options for 217,000 shares issued under the 20162021 Plan.
2006 Stock Incentive Plan
The 2006 Plan became effective May 18, 2006, and expired April 12, 2016. The 2006 Plan provides for the granting of equity awards to key employees, including officers and directors. Options under the 2016 Plan were generally granted at-the-money or above, expire no later than ten years from the date of grant or within three months of when employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The number of shares subject to options available for issuance under the 2006 Plan could not exceed 1,950,000. There were 1,071,000 and 1,193,500 unexpired options remaining from the 2006 Plan at September 30, 2017 and 2016, respectively.
The Company estimates the fair value of options granted usingrecognizes compensation costs only for those shares expected to vest on a Black-Scholes valuation model to establish the expense. When stock-based compensation is awarded to employees, the expense is recognized ratablystraight-line basis over the vesting period. When stock-based compensation is awarded to non-employees, the expense is recognized over therequisite service period of performance. The fairthe awards. Fair values of option awards granted in the three months and nine months ended September 30, 2017 2022 and 2016,2021, and the nine months ended September 30, 2022 and 2021, were estimated using the Black-Scholes option pricing model usingunder the following assumptions:
| | | | Three Months ended September 30, | | Nine months ended September 30, |
| | | | 2017 | 2016 | | 2017 | 2016 |
| Risk free interest rate | | | 1.87% | n/a | | 1.87% | 0.70% - 1.73% |
| Dividend yield | | | 0% | n/a | | 0% | 0% |
| Expected term | | | 5 years | n/a | | 5 years | 2-10 years |
| Expected volatility | | | 44.6% | n/a | | 44.6% | 34.9% - 50.4% |
A summary| | | 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% | |
Determining the assumptions for the expected term and volatility requires management to exercise significant judgment. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the activity undertime-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, incentive plans asthe Company has elected to estimate its expected volatility by benchmarking its volatility to that of September 30, 2017,several public company issuers that operate within its market segment. The guideline companies’ volatility was increased by a size adjustment premium to compensate for the difference in size between the guideline companies and changes during the nine months then ended is presented below.
Incentive Options | |
Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | |
| Outstanding at January 1, 2017 | 1,313,000 | $0.22 | | |
| Granted | 217,000 | 0.35 | | |
| Exercised | - | - | | |
| Expired | (222,000) | 0.40 | | |
| Forfeited | (20,000) | 0.13 | | |
| Outstanding at September 30, 2017 | 1,288,000 | $0.21 | 5.3 | $63,528 |
| Exercisable at September 30, 2017 | 1,061,000 | $0.18 | 5.4 | $62,628 |
Company in its calculation.There were 217,000265,000 options with grant date fair values totaling $157,300 and 30,000 options with grant date fair values totaling $34,500 granted during the three months and nine months ended September 30, 2017. The weighted-average2022 and 2021, respectively. There were 1,177,000 options with grant date fair value ofvalues totaling $2,231,970, and 302,500 options granted during both the three months and nine months ended September 30, 2017, was $0.10, and the weighted-averagewith grant date fair value of optionsvalues totaling $363,550 granted during both the three months and nine months ended September 30, 2016, was $0.04.2022 and 2021, respectively. There were no107,000 and 65,000 options exercised during the ninethree months ended September 30, 2017 2022 and 2016.2021, respectively. There were 264,000 options and 450,000 options exercised during the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2017, 2022, there was $15,009$2,019,066 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the stock incentive plans; thatplans. That cost is expected to be recognized over a weighted-average period of four9.4 months.
Total compensation expense related to these plans was $6,908$614,094 and $2,857$80,882 for the quartersthree months ended September 30, 2017 2022 and 2016,2021, respectively, none of which related to options awarded to non-employees. Total compensation expense related to these plans was $7,230 and $8,329$1,455,835 and $220,455 for the nine months ended September 30, 2017 2022 and 2016,2021, respectively, noneand is included in selling, general and administrative expenses on the condensed consolidated statements of which related to options awarded to non-employees. Compensation expense relating to prior periods in the amountoperations.
Note 9.Revolving Line of $612 was reversed in the nine months ended Credit and Notes Payable
On September 30, 2017, from options that were forfeited prior to vesting, and are not included in 2022, the total compensation expense above.
Nonvested option awards as of September 30, 2017 and changes during the nine months ended September 30, 2017 were as follows:
| | | Weighted average grant date fair value |
| Nonvested at January 1, 2017 | 45,000 | $0.07 |
| Granted | 217,000 | 0.10 |
| Vested | (15,000) | 0.06 |
| Forfeited | (20,000) | 0.04 |
| Nonvested at September 30, 2017 | 227,000 | $0.10 |
4.
Revolving line of Credit
The Company
hasentered a revolving line of credit with
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. As of September 30, 2022, 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. As of September 30, 2022 there is $1,000,000 of borrowing availability under this line of credit.On April 16, 2021, 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 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 expired on April 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.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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.$1,000,000 at an interest rate of the greater of 4.0% or LIBOR +3.5%. The line expiresprior LOC originally was due to expire on MayJuly 31, 2018. As2021 and was secured by the assets of September 30, 2017, no amounts were outstanding under this line of credit.the Company. The Company did not borrow against thisSummit line of credit was used to pay off the prior LOC and it was closed on May 3, 2021.
On April 16, 2021, we entered into a $1 million term loan agreement with Summit Community Bank. The term of the loan was two years with monthly installments comprising a fixed principal amount plus interest accruing at a fixed rate of 4.89%. The loan was collateralized by a security interest in substantially all the assets of the Company. On 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.
Note 10.Common Stock Purchase Agreement
On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, but not the obligation, to sell to B. Riley up to $15,000,000 of shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), from time to time. Sales of Common Stock to B. Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B. Riley under the Purchase Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of 1933, as amended (the “Securities Act”) the resale by B. Riley of up to 4,500,000 shares of Common Stock that the Company may issue or elect, in the last twelve months.
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
During the three- and nine-month periods ended September 30, 2022, the Company’s effective tax rate was 2.2% and 13.6%, respectively. 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 in all jurisdictions.
| WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Note 13. (Loss) Income (Loss) Per Share
