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, 2022
Or
☐ | |||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File Number 00
WaveDancer, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 54-1167364 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
12015 Lee Jackson Memorial Highway, Suite 210 | ||
Fairfax, Virginia | 22033 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | WAVD | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☑ | |||||||||||
Smaller reporting company | ||||||||||||||||
☑ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Number of November 9, 2017, 11,201,760 shares outstanding by each class of common stock, as of November 7, 2022:
Common Stock, $0.001 par value $0.01 per share, of the registrant were outstanding.– 19,165,548 shares outstanding
This document is also available through our website at http://ir.wavedancer.com/.
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
WAVEDANCER, INC.
FORM 10-Q
Table of Contents
Page Number | |||
PART I. | FINANCIAL INFORMATION | ||
Item 1. | Condensed Consolidated Financial Statements (unaudited except for the balance sheet as of December 31, | ||
Condensed Consolidated Balance Sheets as of September 30, | |||
2022 and December 31, | 3 | ||
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months | |||
ended September 30, | 4 | ||
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the nine months | |||
ended September 30, | 5 | ||
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 | 6 | ||
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, | |||
Notes to Condensed Consolidated Financial Statements | |||
Item 2. | Management's Discussion and Analysis of | ||
Financial Condition and Results of Operations | |||
Item 4. | Controls and Procedures | ||
PART II. | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | ||
Item 1A. | Risk Factors | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 3. | Defaults Upon Senior Securities | ||
Item 4. | Mine Safety Disclosures | ||
Item 5. | Other Information | ||
Item 6. | Exhibits | ||
SIGNATURES |
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVEDANCER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,521,651 | $ | 4,931,302 | ||||
Accounts receivable | 1,532,174 | 1,664,862 | ||||||
Prepaid expenses and other current assets | 302,443 | 276,990 | ||||||
Total current assets | 3,356,268 | 6,873,154 | ||||||
Intangible assets, net of accumulated amortization of $1,250,711 and $201,032 | 6,999,289 | 8,048,968 | ||||||
Goodwill | 5,330,645 | 7,585,269 | ||||||
Right-of-use operating lease asset | 536,455 | 672,896 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $381,473 and $347,886 | 305,729 | 105,256 | ||||||
Other assets | 79,305 | 77,100 | ||||||
Total assets | $ | 16,607,691 | $ | 23,362,643 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 227,560 | $ | 650,499 | ||||
Accrued payroll and related liabilities | 701,652 | 524,055 | ||||||
Commissions payable | 225,096 | 224,250 | ||||||
Other accrued liabilities | 680,269 | 204,080 | ||||||
Contract liabilities | 37,686 | 186,835 | ||||||
Operating lease liability - current | 203,342 | 192,128 | ||||||
Total current liabilities | 2,075,605 | 1,981,847 | ||||||
Operating lease liability - non-current | 353,486 | 507,120 | ||||||
Deferred tax liabilities, net | 154,252 | 1,167,504 | ||||||
Other liabilities | 1,394,467 | 2,265,000 | ||||||
Total liabilities | 3,977,810 | 5,921,471 | ||||||
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 | ||||||
Additional paid-in capital | 35,315,514 | 31,789,464 | ||||||
Accumulated deficit | (21,741,231 | ) | (13,436,963 | ) | ||||
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 | ) | ||||
Total stockholders' equity | 12,629,881 | 17,441,172 | ||||||
Total liabilities and stockholders' equity | $ | 16,607,691 | $ | 23,362,643 |
September 30, 2017 | December 31, 2016 | |
(Unaudited) | (see Note 1) | |
ASSETS | ||
Current assets: | ||
Cash and cash equivalents | $2,550,719 | $1,895,372 |
Accounts receivable, net | 1,809,200 | 1,157,387 |
Prepaid expenses and other current assets | 493,523 | 663,556 |
Notes receivable, current | 2,489 | 2,630 |
Total current assets | 4,855,931 | 3,718,945 |
Property and equipment, net | 13,528 | 27,198 |
Other assets | 6,281 | 6,281 |
Total assets | $4,875,740 | $3,752,424 |
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
Current liabilities: | ||
Accounts payable | $958,289 | $48,974 |
Commissions payable | 757,672 | 853,340 |
Other accrued liabilities | 635,183 | 396,081 |
Deferred revenue | 449,466 | 615,035 |
Accrued payroll and related liabilities | 268,607 | 206,475 |
Total liabilities | 3,069,217 | 2,119,905 |
Stockholders' equity: | ||
Common stock, par value $0.01, 30,000,000 shares authorized; | ||
12,844,376 shares issued, 11,201,760 shares outstanding as of September 30, 2017 and December 31, 2016 | 128,443 | 128,443 |
Additional paid-in capital | 14,637,980 | 14,631,362 |
Accumulated deficit | (12,029,689) | (12,197,075) |
Treasury stock, 1,642,616 shares at cost | (930,211) | (930,211) |
Total stockholders' equity | 1,806,523 | 1,632,519 |
Total liabilities and stockholders' equity | $4,875,740 | $3,752,424 |
The accompanying notes are an integral part of the condensed consolidated financial statements
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
WAVEDANCER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE 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 |
For the three months ended | ||
September 30, | ||
2017 | 2016 | |
Revenues: | ||
Professional fees | $1,385,257 | $885,505 |
Software sales | 1,346,537 | 1,146,048 |
Total revenues | 2,731,794 | 2,031,553 |
Cost of revenues: | ||
Cost of professional fees | 776,404 | 468,556 |
Cost of software sales | 1,319,499 | 1,006,912 |
Total cost of revenues | 2,095,903 | 1,475,468 |
Gross profit | 635,891 | 556,085 |
Selling, general and administrative expenses | 386,929 | 428,852 |
Commissions expense | 140,963 | 187,030 |
Income (loss) from operations | 107,999 | (59,797) |
Other income | 2,285 | 2,559 |
Income (loss) before provision for income taxes | 110,284 | (57,238) |
Provision for income taxes | - | - |
Net income (loss) | $110,284 | $(57,238) |
Net income (loss) per common share: | ||
Basic | $0.01 | $(0.01) |
Diluted | $0.01 | $(0.01) |
Weighted average common shares outstanding: | ||
Basic | 11,201,760 | 11,201,760 |
Diluted | 11,510,711 | 11,201,760 |
The accompanying notes are an integral part of the condensed consolidated financial statements
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
WAVEDANCER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (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 |
For the nine months ended | ||
September 30, | ||
2017 | 2016 | |
Revenues: | ||
Professional fees | $3,676,730 | $2,655,006 |
Software sales | 4,592,828 | 2,667,567 |
Total revenues | 8,269,558 | 5,322,573 |
Cost of revenues: | ||
Cost of professional fees | 1,990,383 | 1,509,281 |
Cost of software sales | 4,506,099 | 2,373,788 |
Total cost of revenues | 6,496,482 | 3,883,069 |
Gross profit | 1,773,076 | 1,439,504 |
Selling, general and administrative expenses | 1,231,863 | 1,451,423 |
Commissions expense | 380,267 | 408,695 |
Income (loss) from operations | 160,946 | (420,614) |
Other income | 6,440 | 7,349 |
Income (loss) before provision for income taxes | 167,386 | (413,265) |
Provision for income taxes | - | - |
Net income (loss) | $167,386 | $(413,265) |
Net income (loss) per common share: | ||
Basic | $0.01 | $(0.04) |
Diluted | $0.01 | $(0.04) |
Weighted average common shares outstanding: | ||
Basic | 11,201,760 | 11,201,760 |
Diluted | 11,509,202 | 11,201,760 |
The accompanying notes are an integral part of the condensed consolidated financial statements
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
WAVEDANCER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
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: | ||||||||
Depreciation and amortization | 1,083,266 | 111,123 | ||||||
Goodwill impairment | 2,254,624 | - | ||||||
Stock-based compensation | 1,455,835 | 220,455 | ||||||
Deferred income tax benefit | (1,013,252 | ) | - | |||||
Amortization of right-of-use assets | 136,441 | 54,652 | ||||||
Non-cash interest expense | 59,467 | - | ||||||
Change in fair value of contingent consideration liability | (930,000 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 132,688 | (820,954 | ) | |||||
Prepaid expenses and other current assets | 84,842 | (140,015 | ) | |||||
Contract assets | - | 210,688 | ||||||
Accounts payable | (422,939 | ) | 508,408 | |||||
Contract liabilities | (149,149 | ) | (868,839 | ) | ||||
Accrued payroll and related liabilities and other accrued liabilities | 653,786 | 63,404 | ||||||
Operating lease liability | (142,420 | ) | (37,989 | ) | ||||
Commissions payable | 846 | 54,812 | ||||||
Net cash used in operating activities | (5,100,233 | ) | (425,810 | ) | ||||
Cash flows from investing activities | ||||||||
Acquisition of property and equipment | (234,060 | ) | (56,010 | ) | ||||
Acquisition of Tellenger, net of cash acquired | - | (2,233,884 | ) | |||||
Net cash used in investing activities | (234,060 | ) | (2,289,894 | ) | ||||
Cash flows from financing activities | ||||||||
Borrowing under revolving line of credit | - | 502,306 | ||||||
Repayments under revolving line of credit | - | (100,000 | ) | |||||
Borrowing under long-term note | - | 1,000,000 | ||||||
Repayments of long-term note | - | (251,849 | ) | |||||
Proceeds from issuance of stock | 1,887,000 | 3,294,554 | ||||||
Proceeds from exercise of stock options | 37,642 | 95,146 | ||||||
Net cash provided by financing activities | 1,924,642 | 4,540,157 | ||||||
Net (decrease) increase in cash and cash equivalents | (3,409,651 | ) | 1,824,453 | |||||
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 | ||||
Supplemental cash flow Information | ||||||||
Interest paid | $ | 1,002 | $ | 32,197 | ||||
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 |
For the nine months ended September 30, | ||
2017 | 2016 | |
Cash flows from operating activities: | ||
Net income (loss) | $167,386 | $(413,265) |
Adjustments to reconcile net income (loss) to net cash | ||
provided by operating activities: | ||
Depreciation and amortization | 13,670 | 22,044 |
Stock-based compensation, net of forfeitures | 6,618 | 8,329 |
Bad debts | - | 13,781 |
Changes in operating assets and liabilities: | ||
Accounts receivable | (651,813) | (9,265) |
Prepaid expenses and other current assets | 170,033 | 105,775 |
Accounts payable, accrued payroll and related | ||
liabilities, and other accrued liabilities | 1,210,549 | 1,086,156 |
Deferred revenue | (165,569) | (117,248) |
Commissions payable | (95,668) | (51,528) |
Net cash provided by operating activities | 655,206 | 644,779 |
Cash flows from investing activities: | ||
Acquisition of property and equipment | - | (11,581) |
Increase in notes receivable - employees | (2,500) | (5,768) |
Payments received on notes receivable - employees | 2,641 | 2,179 |
Net cash provided by (used in) investing activities | 141 | (15,170) |
Net increase in cash and cash equivalents | 655,347 | 629,609 |
Cash and cash equivalents, beginning of the period | 1,895,372 | 2,167,928 |
Cash and cash equivalents, end of the period | $2,550,719 | $2,797,537 |
Supplemental cash flow information | ||
Interest paid | $- | $- |
Income taxes paid | $- | $- |
The accompanying notes are an integral part of the condensed consolidated financial statements
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
WAVEDANCER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Nine months ended September 30, 2022 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common | Paid-In | Accumulated | Treasury | |||||||||||||||||
Stock | Capital | Deficit | Stock | Total | ||||||||||||||||
Balances at December 31, 2021 | $ | 18,882 | $ | 31,789,464 | $ | (13,436,963 | ) | $ | (930,211 | ) | $ | 17,441,172 | ||||||||
Net loss | - | - | (2,078,307 | ) | - | (2,078,307 | ) | |||||||||||||
Stock option compensation | - | 312,176 | - | - | 312,176 | |||||||||||||||
Issuance of stock from exercise of options | 105 | 26,694 | - | - | 26,799 | |||||||||||||||
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 | ) | |||||||||||||
Stock option compensation | - | 529,565 | - | - | 529,565 | |||||||||||||||
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 | |||||||||||||
Net loss | - | - | (4,700,519 | ) | - | (4,700,519 | ) | |||||||||||||
Stock option compensation | - | 614,094 | - | - | 614,094 | |||||||||||||||
Stock issued | 1,663 | 1,997,837 | - | - | 1,999,500 | |||||||||||||||
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 |
Nine months ended September 30, 2021 | ||||||||||||||||||||
Balances at December 31, 2020 | $ | 129,043 | $ | 14,720,065 | $ | (12,305,514 | ) | $ | (930,211 | ) | $ | 1,613,383 | ||||||||
Net income | - | - | 270,815 | - | 270,815 | |||||||||||||||
Stock option compensation | - | 27,711 | - | - | 27,711 | |||||||||||||||
Stock issued | 3,306 | 492,693 | - | - | 495,999 | |||||||||||||||
Issuance of stock from exercise of options | 250 | 3,300 | - | - | 3,550 | |||||||||||||||
Balances at March 31, 2021 | 132,599 | 15,243,769 | (12,034,699 | ) | (930,211 | ) | 2,411,458 | |||||||||||||
Net income | - | - | 43,157 | - | 43,157 | |||||||||||||||
Stock option compensation | - | 111,862 | - | - | 111,862 | |||||||||||||||
Stock issued | 683 | 197,872 | - | - | 198,555 | |||||||||||||||
Issuance of stock from exercise of options | 3,600 | 76,395 | - | - | 79,995 | |||||||||||||||
Balances at June 30, 2021 | 136,882 | 15,629,898 | (11,991,542 | ) | (930,211 | ) | 2,845,027 | |||||||||||||
Net loss | - | - | (95,527 | ) | - | (95,527 | ) | |||||||||||||
Stock option compensation | - | 80,882 | - | - | 80,882 | |||||||||||||||
Stock issued | 14,000 | 2,786,000 | - | - | 2,800,000 | |||||||||||||||
Issuance of stock from exercise of options | 650 | 10,951 | - | - | 11,601 | |||||||||||||||
Balances at September 30, 2021 | $ | 151,532 | $ | 18,507,731 | $ | (12,087,069 | ) | $ | (930,211 | ) | $ | 5,641,983 |
The accompanying notes are an integral part of the condensed consolidated financial statements
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
WAVEDANCER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Organization and Business
WaveDancer, Inc. (“WaveDancer”), formerly known as Information Analysis Incorporated (the “Company”(“IAI”), to which we sometimes refer as IAI, is engaged in the business of developing and maintaining information technology (IT) systems, modernizing client information systems, and performingproviding professional services to U.S. government and commercial organizations. We presently concentrate ouragencies to modernize information technology services, in selling and experiencesupporting third-party software, primarily Adobe products, to developing web-basedU.S. government agencies, and, mobile devicewith our December, 2021 acquisition of Gray Matters, Inc. (“GMI” or “Gray Matters”), in providing blockchain enabled supply chain management software solutions (including electronic forms conversions)(“SCM”). With the acquisition of GMI, 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”), data analytics, cyber security applications,organizes our company, manages resource allocations, and legacy software migrationmeasures performance among two operating and modernization for various agenciesreportable segments: Tellenger and GMI.
Liquidity and Going Concern
During the nine months ended September 30, 2022, the Company generated a loss from operations of $9,247,607. As of September 30, 2022, the federal government. We provide softwareCompany had working capital of $1,280,663, including cash and servicescash equivalents of $1,521,651, and had an accumulated deficit of $21,741,231 . The Company intends to governmentcontinue to invest in its SCM platform and commercial customers throughout the United States, withto execute its strategy to become a concentrationleading zero trust, blockchain-enabled cybersecurity company and believes strongly in the Washington, D.C. metropolitan area.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s unaudited consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q10-Q and Article 8-038-03 of Regulation S-X.S-X. Accordingly, certain information and footnote disclosures normally included in 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”). In the opinion of management, the unaudited financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with ourthe Company’s audited financial statements for the year ended December 31, 2016 2021 included in the Annual Report on Form 10-K10-K filed by the Company with the SEC on March 31, 2017 (theApril 12, 2022 (the “Annual Report”)., as amended. The accompanying December 31, 2016 2021 balance sheet and financial information was derived from ourthe audited financial statements included in the Annual Report. 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.
The 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.
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Use of Estimates and Assumptions
Preparation of condensed consolidated financial statements in accordanceconformity with GAAP requires managementus to make estimates and assumptions that affect certainthe amounts reported 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.
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.
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.
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 | 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 |
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.
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.
Note 6. | Acquisitions |
Tellenger, Inc.
On April 7, 2021, the Company reports in a particular period.
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, 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 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.
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 |
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.
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% |
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 | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value |
Outstanding at January 1, 2017 | 1,313,000 | $0.22 | ||
Granted | 217,000 | 0.35 | ||
Exercised | - | - | ||
Expired | (222,000) | 0.40 | ||
Forfeited | (20,000) | 0.13 | ||
Outstanding at September 30, 2017 | 1,288,000 | $0.21 | 5.3 | $63,528 |
Exercisable at September 30, 2017 | 1,061,000 | $0.18 | 5.4 | $62,628 |
There were 217,000265,000 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.
Shares | Weighted average grant date fair value | |
Nonvested at January 1, 2017 | 45,000 | $0.07 |
Granted | 217,000 | 0.10 |
Vested | (15,000) | 0.06 |
Forfeited | (20,000) | 0.04 |
Nonvested at September 30, 2017 | 227,000 | $0.10 |
On 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
Basic income (loss)loss per share excludes dilution and is computed by dividing income (loss)loss available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted incomeearnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss because the inclusion of such items would be antidilutive. The antidilutive effect of 52,655 shares and 26,774437,352 shares from stock options and zero shares from warrants were excluded from diluted shares for the three months and nine months, respectively, ended September 30, 2016.
The following is a reconciliation of the amounts used in calculating basic and diluted net (loss) income (loss) 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 |
Net income (loss) | Shares | Per Share Amount | |
Basic net income per common share for the three months ended September 30, 2017: | |||
Income available to common stockholders | $110,284 | 11,201,760 | $0.01 |
Effect of dilutive stock options | - | 308,951 | - |
Diluted net income per common share for the three months ended September 30, 2017 | $110,284 | 11,510,711 | $0.01 |
Basic net loss per common share for the three months ended September 30, 2016: | |||
Loss available to common stockholders | $(57,238) | 11,201,760 | $(0.01) |
Effect of dilutive stock options | - | - | - |
Diluted net loss per common share for the three months ended September 30, 2016 | $(57,238) | 11,201,760 | $(0.01) |
Basic net income per common share for the nine months ended September 30, 2017: | |||
Income available to common stockholders | $167,386 | 11,201,760 | $0.01 |
Effect of dilutive stock options | - | 307,442 | - |
Diluted net income per common share for the nine months ended September 30, 2017 | $167,386 | 11,509,202 | $0.01 |
�� | |||
Basic net loss per common share for the nine months ended September 30, 2016: | |||
Loss available to common stockholders | $(413,265) | 11,201,760 | $(0.04) |
Effect of dilutive stock options | - | - | - |
Diluted net loss per common share for the nine months ended September 30, 2016 | $(413,265) | 11,201,760 | $(0.04) |
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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, 20162021 (“2016 10-K”Annual Report”) and in other filings with the Securities and Exchange Commission.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This list highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs,occur, our business, financial condition and operating results would likely suffer. These risks include, among others, the following:
● | Our ability to successfully execute our business plan and necessary transition activities following the acquisition of Gray Matters, Inc. |
● | Recent, past and future acquisitions and investments could disrupt our business and harm our financial condition and operating results. |
● | Our business is subject to risks related to the COVID-19 pandemic and the conflict in Ukraine. |
● | Our operating history and recent and proposed changes to our business model make it difficult to evaluate our current business and prospects and may increase the risk that we will not be successful. |
● | We have had operating losses in three of each of the last four years and may not achieve or maintain profitability in the future. |
● | If the cybersecurity, Internet of Things (“IoT”), enterprise resource planning (“ERP”), command and control (“C2”), or supply chain management (“SCM”) markets are not receptive to our solutions, our sales will not grow as quickly as anticipated, or at all, and our business, results of operations and financial condition would be harmed. |
● | 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. |
● | Our business is subject to risks related to the use of blockchain and distributed ledger technology. |
● | 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. |
● | Our Gray Matters business currently has one key customer and since our acquisition of GMI in December 2022, there have been delays in the timing of revenue recognition vs our initial expectations. Continued delays in recognizing revenue for GMI could have an adverse impact on the carrying value of the intangible assets and goodwill that was recorded in connection with the acquisition of GMI. |
● | Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or subscriptions without compensating us. |
● | Our use of open-source software in our products and subscriptions could negatively affect our ability to sell our products and subscriptions and subject us to possible litigation. |
● | 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 Amazon Web Services (“AWS”), Microsoft, and other third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations. |
● | Failure to comply with governmental laws and regulations could harm our business. |
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
● | 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 20162021 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.
Our Business
Founded in 1979 IAIas Information Analysis Incorporated, the Company changed its name to WaveDancer, Inc. and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is in the business of modernizing client information systems, developing and maintaining information technology (“IT”) systems, developing electronic forms,modernizing client information systems, and performing consultingother IT-related professional services to government and commercial organizations. We have performed software conversion projects
The Company is an IT provider primarily for over 100 commercial andthe benefit of federal government customers, including Computer Sciences Corporation, IBM, Computer Associates, Sprint, Citibank, U.S. Department of Homeland Security, U.S. Treasury Department, U.S. Department of Agriculture, U.S. Department of Education, U.S. Department of Energy, U.S. Army, U.S. Air Force, U.S. Department of Veterans Affairs, and the Federal Deposit Insurance Corporation. Today,agencies. At present, we primarily apply our technology, services and experience to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, data analytics, and we are in the process of acquiring talent and expertise in developing cybersecurity and cloud services practices. Our focus is on enterprise IT solutions primarily relating to system modernization, cloud-based solutions and cybersecurity protection.
Since the Company’s inception, we have performed software development and conversion projects for over 100 commercial companies and government agencies,customers including, but not limited to, the Department of Agriculture, Department of Defense, Department of Education, Department of Homeland Security, Department of the Treasury, U.S. Small Business Administration, U.S. Army, U.S. Air Force, Department of Veterans Affairs, and to developingGeneral Dynamics Information Technology (formerly Computer Sciences Corporation, CSRA).
Modernization has been a core competency of the Company for over 20 years. We have modernized over 100 million lines of COBOL code for over 35 governmental and commercial customers. We maintain a pool of skilled COBOL programmers. This provides us with a competitive advantage as the labor pool of such programmers is shrinking as aging software professionals retire. Our business has also historically relied upon the reselling of applications, primarily for forms development.
Through our acquisition in April 2021 of Tellenger, Inc. (“Tellenger”), which is now a wholly-owned subsidiary of the Company, we acquired competencies in web-based solutions for agenciesand cybersecurity. Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics. We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud. We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized. It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the U.S. federal government.
In December 2021, we announced the reorganization of 2016. Many government agencies are now requiring this certificationour entire professional services practice into Tellenger, and as a basis for participatingresult, our professional services are contained in designated contract solicitations. ISO 9001:2015 is a process-based certification recognizing organizations that can linksingle entity. Through Tellenger, we perform services such as business objectives with operating effectivenessprocess re-engineering, cloud migrations, and institutionalize continual improvement in its operations. In order to achieve certification, IAI was required to demonstrate through external audit our ability to consistently provide products and services that meet customer and applicable statutory and regulatory requirements set forthSoftware-as-a-Service (“SaaS”) implementations on behalf of clients in the referenced ISO 9001:2015 standard. Companies thatprivate and public sector with an aim to increase productivity, gain efficiencies, and achieve such certification have demonstrated effective implementationkey performance indicators. Tellenger is appraised at Capability Maturity Model Integration (CMMI) Level 3.
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Through our acquisition of documentationGray Matters, Inc. and recordsin 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 top management’s commitment(“SCM”) industry and in United States intelligence, national security and diplomatic organizations. Gray Matters uses a “Zero Trust” product and is designed to their customers, establishmentsecure and monitor the lifecycle of clear policy, good planningmanufacturing through destruction and implementation, good resource management, efficient process control,recycling.
Our Strategy
Our strategy is to grow our business organically as well as measurementthrough acquisitions.
Through the acquisitions of Tellenger and analysis.
To grow organically, we have hired and plan to continue to hire, business development personnel and intend to become more proactive in bidding as a prime contracts with U.S.contractor on government agencies generated 67.4%proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.
Results of our revenue, subcontracts under federal procurements generated 27.7% of our revenue, and 4.9% of our revenue came from commercial contracts. The terms of these contracts and subcontracts vary from single transactions to five years. Within this group of prime contracts with U.S. government agencies, one software sale generated 23.9% of our revenue and one other contract generated 12.0% of our revenue. One subcontract generated 22.0% of our revenue.
Revenue
Total revenue was $1,385,257 in the third quarter of 2017 versus $885,505 in the corresponding quarter in 2016, an increase of $499,752, or 56.4%, and software revenue was $1,346,537 in the third quarter of 2017 versus $1,146,048 in the third quarter of 2016, an increase of $200,489, or 17.5%. Revenue from professional fees increased due primarily to one new subcontract under a federal procurement, though there were several minor increases and decreases in activity under our other professional services contracts. The increase in our software revenue in 2017 versus the same period in 2016 is due to the non-recurring nature of many of our software sales transactions. Software sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold and referral fees earned. The revenue recognized for the same volume of software sales activity would be significantly less in 2018 and beyond upon the adoption of Topic 606, discussed above, wherein revenue from many of our software sales transactions will be reported net of the direct costs due to a redefinition of “control” of the software product in the course of the software sales transactions.
Tellenger
The decrease in 2016.
Gross Profit
Gross profit decreased by $497,253 or 55.4%. Professional fee revenue was $3,676,730 in the first nine months of 2017 versus $2,655,006 in the corresponding nine months in 2016, an increase of $1,021,724, or 38.5%50.8%, and software revenue was $4,592,828 in the first nine months of 2017 versus $2,667,567 in the first nine months of 2016, an increase of $1,925,261, or 72.2%. Revenue from professional fees increased due primarily to one new subcontract under a federal procurement, though there were several minor increases and decreases in activity under our other professional services contracts. The increase in our software revenue in 2017 versus the same period in 2016 is due to the non-recurring nature of many of our software sales transactions. One software sales transaction accounted for $1,686,952 of the increase. Software sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold and referral fees earned. The revenue recognized$481,622 for the same volume of software sales activity would be significantly less in 2018 and beyond upon the adoption of Topic 606, discussed above, wherein revenue from many of our software sales transactions will be reported net of the direct costs due to a redefinition of “control” of the software product in the course of the software sales transactions.
Tellenger
The decrease in gross profit was attributable toincludes a decrease from professional fees atservices of 317,261, partially offset by an increase in margin on third-party software sales of $78,068. The reduced margin on professional services is driven by the reduced revenues discussed above as well as a change in the mix of contracts generating revenue and the related billing rates resulting in a reduction in our gross profit percentage of 45.9%, and $86,729 of the gross profit was attributablerate to software sales at30.7% from 34.5%.
Blockchain SCM
We recorded a gross profit percentage of 1.9%. In the same nine months in 2016, we reported gross profit for professional fees of $1,145,725, or 43.2%, of professional fee revenue, andnegative gross profit of $293,779, or 11.0%$258,060 in our Blockchain SCM operating segment. As noted above, we experienced delays in receiving approval from our government customer of software sales. Gross profit from professional fees increasedcertain milestone achievements specified in our contract with that customer. However, we continued to incur costs supporting the increasecontract resulting in revenue, and increased as a percentage of sales due to the timing of revenue recognition versus the accumulation of direct costs on a certain fixed price contract, as well as the timing of revenue recognition versus the accumulation of direct costs of some at-risk work performed in early 2016. Gross profit on software sales decreased in terms of dollars and as a percentage of sales due to a decrease in referral fees for facilitating third-party sales, for which there were no direct costs incurred by us. The referral fees for facilitating third party sales were $19,612 for the first nine months of 2017 versus $239,221 in the same period of 2016. Software product sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold and referral fees earned.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses exclusivehave increased significantly since the second half of sales commissions, were $1,231,863, or 14.9% of revenues,2021 when we began to implement our transformative strategy described in the first nineOur Strategy section above and in our Annual Report. The following table shows the major elements of SG&A expenses for the three months of 2017 versus $1,451,423, or 27.3% of revenues,ended September 30, 2022 and 2021 and the increases 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 |
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Acquisition Costs
We incurred acquisition expenses totaling $38,617 in the first ninethree months of 2016.ended September 30, 2022 as compared to $39,245 in the corresponding quarter in 2021. These expenses decreased $219,560, or 15.1%,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 quarter 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 in the first nine monthsreporting 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 2016. These decreases are largelythe 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 decreasesOperations
Loss from operations was $4,737,862 in sales labor costs, decreasesthe third quarter of 2022 compared to a loss from operations of $84,267 in technical training costs, decreasesthe corresponding quarter in legal fees, decreases2021, an increase in bad debt expense, and decreasesthe loss of $4,653,595. The increase in advertising and business promotion costs. These decreases were offset some by increasesthe loss from operations is primarily the result of the decrease in overhead laborgross profit of $497,253 and the costincrease in SG&A expenses of obtaining$1,902,346, all as discussed above, and maintaining our ISO 9001 certification.
Results of revenues, in the first nine months of 2017 versus $408,695, or 7.7% of revenues, in the first nine months of 2016. Commissions are driven by varying factorsOperations – Nine Months Ended September 30, 2022 and are earned at varying rates for each salesperson.
Revenue
Total revenue was $9,619,273 for the nine months ended September 30, 2017,2022, as compared to $12,451,467 in the comparable period in 2021, a decrease of $2,832,194, or 22.7%. 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 decrease in professional services revenue of $2,107,105 and a decrease in third-party 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 of resources deployed 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 ($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.
Gross Profit
Gross profit was $167,386,$1,787,468 for the nine months ended September 30, 2022, as compared to $2,954,453 in the comparable period in 2021, a decrease of $1,166,985 or 2.0%39.5%. 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 from professional services of $692,062, partially offset by increased gross profit from third-party software sales of $76,517. The decline in gross profit from professional services includes two primary declining items: 1) one contract for which much of 2021 included a greater number of resources deployed 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).
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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, 2022 and 2021 and the increases 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 |
Acquisition Costs
We incurred acquisition expenses totaling $829,478 for the nine months ended September 30, 2022 as compared to $192,530 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 finalize 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 versus net lossand gross profit achieved by GMI during the period from the acquisition date through December 31, 2022. In the purchase accounting for GMI in the fourth quarter of $413,265, or (7.8%)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 in the timing of realizing revenue that have pushed a material amount of 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, 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 same periodnine 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 2016.
Critical Accounting Estimate
Our accounting policies are described in Note 1 of our consolidated financial statements – Organization and Summary of Significant Accounting Policies. We prepare our consolidated financial statements in conformity with US GAAP, which require 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 revenues and expenses during the year. Actual results could differ from those estimates. We consider the following policies and estimates to be most critical in understanding the judgments involved in preparing our financial statements for the three and nine months ended September 30, 2022 and the uncertainties that could affect our results of operations, financial condition and cash flows.
Goodwill Impairment Testing
As discussed in Note 5 to our interim consolidated financial statements, during 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 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 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 estimated fair value of our Tellenger reporting unit significantly exceeded its carrying value as of September 30, 2022.
Liquidity and Capital Resources
On September 30, 2022, the first nine monthsCompany had working capital of 2017, were sufficient to provide financing for our operations. Our net cash provided by the combination of our operating and investing activities in the first nine months of 2017 was $655,347. This net cash, when added to a beginning balance of $1,895,372, yieldedapproximately $1.3 million, including cash and cash equivalents of $2,550,719$1.5 million, generated operating losses in 2022 and at September 30, 2022 had an accumulated deficit of $21.7 million. 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 cast substantial doubt about our ability to continue as a going concern.
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Beginning in August 2021 we embarked on a transformative strategy to reposition 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 inability to raise the funds required to complete the deal under 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 negative 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.
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 activities of approximately $5 million through the first 9 months of 2022 and anticipate that our operating activities may use in excess of that amount over the next 12 months, including satisfying our current liabilities of approximately $2.1 million as of September 30, 2017. Accounts receivable increased $651,813, due primarily to software sales that occurred just prior to September 30, 2017, the end of the U.S. federal government’s fiscal year. Prepaid2022 and our other typical operating expenses, including payroll for our workforce and other current assets decreased $170,033 due primarilycosts. 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.
However, the allocation over timeCompany will require additional capital to support its strategy. Other sources of prepaid expenses associated with the maintenance contracts on software sales. Deferred revenue decreased $165,569 due primarily to the recognition of revenue over time from the same maintenance contracts on software sales. Commissions payable decreased $95,668 due to payouts of existing commissions payable balances occurring faster than new commissions were earned.
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 our cash requirements for at least twelve monthsits obligations as they become due. The Company’s unaudited consolidated financial statements do not include any adjustment that might result from the date of filingoutcome of this Form 10-Q.
Item 4.
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, 20172022 (the “Evaluation Date”). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2017,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
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, 2022 |
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
None.
Item 1A.
Risk Factors“Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 20162021, as amended, includes a discussion of our risk factors. There have been no material changes from the risk factors described in our annual report on Form 10-K for the year ended December 31, 2016.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
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.
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
Item 6.Exhibits
10.1 | Incorporated by reference from the Registrant’s Form 8-K filed March 24, 2022 | ||
10.2 | Executive employment agreement between the Company and Timothy G. Hannon. dated March 22, 2022 | Incorporated by reference from the Registrant’s Form 8-K filed March 24, 2022 | |
31.1 | Filed with this Form 10-Q | ||
Filed with this Form 10-Q | |||
Filed with this Form 10-Q | |||
Filed with this Form 10-Q | |||
101.INS | Inline XBRL Instance Document | Filed with this Form 10-Q | |
101.SCH | Inline XBRL Taxonomy Extension Schema | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
WaveDancer, Inc. | Form 10-Q September 30, 2022 |
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WaveDancer, Inc. | ||||||
Date: | November 21, 2022 | By: | /s/ G. James Benoit, Jr. | |||
Chief Executive | ||||||
Date: | November 21, 2022 | By: | /s/ Timothy G. Hannon | |||
Timothy G. Hannon, | ||||||
Chief Financial Officer |