UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| or |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
WaveDancer, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| | |
| (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 | ||
| | | The |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | | ☑ | |||||||||||||
| 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
Number of shares outstanding by each class of common stock, as of November 7, 2023:
Common Stock, $0.001 par value –
This document is also available through our website at http://ir.wavedancer.com/.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
FORM 10-Q
Table of Contents
| Page Number |
||
| PART I. | FINANCIAL INFORMATION | |
| Item 1. | Unaudited Condensed Consolidated Financial Statements | |
| Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 |
||
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
20 |
| Item 4. |
26 | |
| PART II. |
27 | |
| Item 1. |
27 | |
| Item 1A. |
27 | |
| Item 2 |
27 | |
| Item 3. |
27 | |
| Item 4. |
27 | |
| Item 5. |
27 | |
| Item 6. |
28 | |
| 29 | ||
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Intangible assets, net of accumulated amortization of $ and $, respectively | ||||||||
| Goodwill | ||||||||
| Right-of-use operating lease asset | ||||||||
| Property and equipment, net of accumulated depreciation and amortization of $ and $, respectively | ||||||||
| Other assets | ||||||||
| Assets held for sale | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Revolving line of credit | ||||||||
| Premium financing note payable | ||||||||
| Accrued payroll and related liabilities | ||||||||
| Commissions payable | ||||||||
| Income taxes payable | ||||||||
| Other accrued liabilities | ||||||||
| Contract liabilities | ||||||||
| Operating lease liabilities - current | ||||||||
| Deferred acquisition consideration | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities - non-current | ||||||||
| Deferred tax liabilities, net | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity | ||||||||
| Common stock, $ par value shares authorized; and shares issued, and shares outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, shares at cost, as of September 30, 2023 and December 31, 2022 | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Professional fees | $ | $ | ||||||
| Software sales | ||||||||
| Total revenues | ||||||||
| Cost of revenues | ||||||||
| Cost of professional fees | ||||||||
| Cost of software sales | ||||||||
| Total cost of revenues excluding depreciation and amortization | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating income (loss) from continuing operations | ( | ) | ( | ) | ||||
| Gain on sale of equity investment and settlement of contingent consideration receivable | ||||||||
| Other income (expense), net | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ||||
| Loss from discontinued operations | ( | ) | ||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share from discontinued operations | ( | ) | ||||||
| Basic and diluted net loss per share | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Professional fees | $ | $ | ||||||
| Software sales | ||||||||
| Total revenues | ||||||||
| Cost of revenues | ||||||||
| Cost of professional fees | ||||||||
| Cost of software sales | ||||||||
| Total cost of revenues excluding depreciation and amortization | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Gain on litigation settlement | ( | ) | ||||||
| Operating loss from continuing operations | ( | ) | ( | ) | ||||
| Gain on sale of equity investment and settlement of contingent consideration receivable | ||||||||
| Other income, net | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss from continuing operations before income taxes and equity in net loss of affiliate | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net loss from continuing operations before equity in net loss of affiliate | ( | ) | ( | ) | ||||
| Equity in net loss of affiliate | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Income (loss) from discontinued operations | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share from discontinued operations | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss per share | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic and diluted | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss from discontinued operations | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Deferred income tax expense | ||||||||
| Amortization of right-of-use assets | ||||||||
| Accretion of deferred acquisition consideration | ||||||||
| Gain on litigation settlement | ( | ) | ||||||
| Gain on sale of equity investment and settlement of contingent consideration receivable | ( | ) | ||||||
| Equity in loss of affiliate | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Accrued payroll and related liabilities and other accrued liabilities | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Commissions payable | ( | ) | ||||||
| Cash used in operating activities of continuing operations | ( | ) | ( | ) | ||||
| Cash used in operating activities of discontinued operations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment | ( | ) | ||||||
| Proceeds from sale of equity investment and settlement of contingent consideration receivable | ||||||||
| Proceeds from disposal of business | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities | ||||||||
| Borrowings under revolving line of credit | ||||||||
| Repayments under revolving line of credit | ( | ) | ||||||
| Premium financing borrowings | ||||||||
| Premium financing repayments | ( | ) | ||||||
| Proceeds from issuance of stock | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental cash flow Information | ||||||||
| Interest paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Non-cash proceeds on disposal of business | $ | $ | ||||||
| Value of common stock issued in connection with common stock purchase agreement | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Shares of | ||||||||||||||||||||||||
| Common | Additional | |||||||||||||||||||||||
| Stock | Common | Paid-In | Accumulated | Treasury | ||||||||||||||||||||
| Issued | Stock | Capital | Deficit | Stock | Total | |||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock option compensation | - | |||||||||||||||||||||||
| Forfeiture of stock options on disposal of business (Note 2) | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock issued | ||||||||||||||||||||||||
| Amortization of stock issue costs | - | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of stock from exercise of options | ||||||||||||||||||||||||
| Balances at March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Stock option compensation | - | |||||||||||||||||||||||
| Amortization of stock issue costs | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances at June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock option compensation | - | |||||||||||||||||||||||
| Stock issued | ||||||||||||||||||||||||
| Amortization of stock issue costs | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Shares of | ||||||||||||||||||||||||
| Common | Additional | |||||||||||||||||||||||
| Stock | Common | Paid-In | Accumulated | Treasury | ||||||||||||||||||||
| Issued | Stock | Capital | Deficit | Stock | Total | |||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock option compensation | - | |||||||||||||||||||||||
| Issuance of stock from exercise of options | ||||||||||||||||||||||||
| Balances at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock option compensation | - | |||||||||||||||||||||||
| Issuance of stock from exercise of options | ||||||||||||||||||||||||
| Balances at June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock option compensation | - | |||||||||||||||||||||||
| Stock issued | ||||||||||||||||||||||||
| Issuance of stock from exercise of options | ( | ) | ||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Note 1. | Summary of Significant Accounting Policies |
Organization and Business
Founded in 1979 as Information Analysis Incorporated (“IAI”), IAI changed its name to WaveDancer, Inc. (“WaveDancer” or the “Company”) and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.
On March 17, 2023, the Company sold effectively
Prior to March 17, 2023, we had operating segments: Tellenger and Blockchain SCM. Given the classification of GMI, which comprised all of the material operations of the Blockchain SCM segment, as a discontinued operation (see Note 2). After March 17, 2023, the Company manages its business as reportable operating segment.
Liquidity and Going Concern
During the nine months ended September 30, 2023, the Company generated an operating loss from continuing operations of $
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Reverse Stock Split
On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022 included in the Annual Report on Form 10-K filed by the Company with the SEC on April 17, 2023 (the “Annual Report”), as amended. The accompanying December 31, 2022 condensed consolidated balance sheet was derived from the audited financial statements included in the Annual Report but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.
| WaveDancer, Inc. | Form 10-Q September 30, 2023 |
The unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023 include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we” or “our”). All significant intercompany transactions and balances have been eliminated in consolidation.
Other than as discussed in “Equity Method Investments” below, there have been no changes in the Company’s significant accounting policies as of September 30, 2023, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report.
Equity Method Investments
The Company accounts for investments in which it owns between 20% to 50% of the common stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures (“ASC 323”). Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The Company reflects its share of gains and losses from the investment in equity in net loss of affiliate in the unaudited condensed consolidated statements of operations using the most recently available earnings data at the end of the period.
In connection with the sale of GMI to GMDC on March 17, 2023, (the "Sale Date"), the Company received common stock in GMDC representing approximately
Use of Estimates
Preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; fair values of financial instruments, intangible assets, and goodwill, including the underlying estimates of cash flows of our products and reporting unit; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, and the valuation of deferred tax assets and liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, and the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Concentration of Credit Risk
During the three months ended September 30, 2023, the Company’s prime contracts with U.S. government agencies represented
During the three months ended September 30, 2022, the Company’s prime contracts with U.S. government agencies represented
During the nine months ended September 30, 2023, the Company’s prime contracts with U.S. government agencies represented
During the nine months ended September 30, 2022, the Company’s prime contracts with U.S. government agencies represented
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
The Company sold third-party software and maintenance contracts under agreements with major supplier, accounting for
As of September 30, 2023, the Company’s accounts receivable included receivables from subcontracts under federal procurements that represented
As of September 30, 2022, the Company’s accounts receivable included receivables from
Note 2. Sale and Deconsolidation of GMI and Discontinued Operations
On March 17, 2023, the Company entered in and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC, a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc. In exchange for this sale, the Company received common shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred stock referenced below,
The equity interest StealthPoint and other GMDC investors received is in the form of Series A non-participating convertible preferred stock having a one-times (1x) liquidation preference and no cumulative dividends. In addition, the Company and GMDC entered into a transition services agreement whereby the Company continues to provide certain administrative services for GMI. The value of these services is estimated to be $
The components of the consideration received and the methods for determining their fair values as of March 17, 2023 were as follows:
| Consideration | Amount | Description and Valuation Methodology | |||
| Cash at closing | $ | Cash received at closing less estimated value of transition services to be provided. | |||
| Cash after closing | Actual cash operating expenses of GMI from March 1 through March 17, 2023 (prior to the transfer of GMI to GMDC). | ||||
| GMDC common stock | Based on Series A preferred stock issuance to other GMDC investors for $3,000,000 in cash and application of an option pricing model backsolve method and a minority interest discount to estimate the fair value of the common shares of GMDC. | ||||
| Contingent payments | Estimated by applying a discount rate of 40.8% to the projected cash receipts expected over the 7-year horizon. (See Note 5). | ||||
| Total consideration | $ | ||||
The GMDC common stock was accounted for as an equity method investment from March 17, 2023 and through its sale on August 9, 2023. During this period, a net loss of $
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
The following table sets forth details of net earnings from discontinued operations for the nine months ended September 30, 2023 and 2022, which reflects the results of the Blockchain SCM operating segment through the date our controlling financial interest in it was sold – March 17, 2023 (See Note 1).
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Excess of contract costs over revenue | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating expenses - | ||||||||||||||||
| Salaries and benefits | ||||||||||||||||
| Intangibles amortization | ||||||||||||||||
| Stock based compensation, before forfeitures | ||||||||||||||||
| Forfeiture of stock options | ( | ) | ||||||||||||||
| Other operating expenses | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||||||||||
| Goodwill impairment | ||||||||||||||||
| Gain on disposal of business | ( | ) | ||||||||||||||
| Loss before income tax benefit | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax benefit | ||||||||||||||||
| Net loss on discontinued operations | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
During the nine months ended September 30, 2023, there was a total of
The following table presents the components of the assets of our discontinued operations that were classified as held for sale as of December 31, 2022. As of March 31, 2023, GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet.
| December 31, | ||||
| 2022 | ||||
| Customer relationship intangible asset, net of amortization | $ | |||
| Technology intangible asset, net of amortization | ||||
| Capitalized software development costs | ||||
| Total assets of discontinued operations | $ | |||
Note 3. Revenue from Contracts with Customers
Nature of Products and Services
We generate revenue from the sales of information technology professional services, sales of third-party software licenses and implementation and training services, sales of third-party support and maintenance contracts based on those software products, and incentive payments received from third-party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. We sell through our direct relationships with end customers and under subcontractor arrangements.
| WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units has occurred, and units are accepted by the customer or are reasonably expected to be accepted. Generally, revenue under fixed-price arrangements and mixed arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer. For fixed-price arrangements under which documentary evidence of acceptance or receipt of deliverables is not present or withheld by the customer, the Company recognizes revenue when it has the right to invoice the customer. For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time.
Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses. The Company’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. Revenue for bulk desktop software licenses for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. For desktop software licenses sold on an individual license basis to non-government customers, where the Company has no obligation to the customer after the third-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs.
Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.
Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.
Disaggregation of Revenue from Contracts with Customers
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Contract Type | Amount | Percentage | Amount | Percentage | ||||||||||||
| Services time & materials | $ | % | $ | % | ||||||||||||
| Services fixed price over time | % | % | ||||||||||||||
| Services combination | % | % | ||||||||||||||
| Services fixed price per unit | % | % | ||||||||||||||
| Third-party software | % | % | ||||||||||||||
| Software support & maintenance | % | % | ||||||||||||||
| Incentive payments | % | % | ||||||||||||||
| Total revenue | $ | % | $ | % | ||||||||||||
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Contract Type | Amount | Percentage | Amount | Percentage | ||||||||||||
| Services time & materials | $ | % | $ | % | ||||||||||||
| Services fixed price over time | % | % | ||||||||||||||
| Services combination | % | % | ||||||||||||||
| Services fixed price per unit | % | % | ||||||||||||||
| Third-party software | % | % | ||||||||||||||
| Software support & maintenance | % | % | ||||||||||||||
| Incentive payments | % | % | ||||||||||||||
| Total revenue | $ | % | $ | % | ||||||||||||
Contract Balances
Accounts Receivable
Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were
Accounts receivable as of September 30, 2023 and December 31, 2022, consist of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Billed federal government | $ | $ | ||||||
| Billed commercial and local government | ||||||||
| Unbilled receivables | ||||||||
| Accounts receivable | $ | $ | ||||||
Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.
Contract Liabilities
Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Changes in contracts liabilities balances are as follows:
| Balance at December 31, 2022 | $ | |||
| Contract liabilities added | ||||
| Revenue recognized | ( | ) | ||
| Balance at March 31, 2023 | ||||
| Contract liabilities added | ||||
| Revenue recognized | ( | ) | ||
| Balance at June 30, 2023 | ||||
| Contract liabilities added | ||||
| Revenue recognized | ( | ) | ||
| Balance at September 30, 2023 | $ |
| Balance at December 31, 2021 | $ | |||
| Contract liabilities added | ||||
| Revenue recognized | ( | ) | ||
| Balance at March 31, 2022 | ||||
| Contract liabilities added | ||||
| Revenue recognized | ( | ) | ||
| Balance as of June 30, 2022 | ||||
| Contract liabilities added | ||||
| Revenue recognized | ( | ) | ||
| Balance at September 30, 2022 | $ |
Revenues recognized during the three months ended September 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Deferred Costs of Revenue
Deferred costs of revenue consist of the costs of third-party support and maintenance contracts for enterprise server-based software. These costs are reported under the prepaid expenses and other current assets caption on the Company’s condensed consolidated balance sheets. The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue. As of September 30, 2023, and December 31, 2022 the Company had $
| Balance at December 31, 2021 | $ | |||
| Deferred costs added | ||||
| Deferred costs expensed | ( | ) | ||
| Balance at March 31, 2022 | ||||
| Deferred costs expensed | ( | ) | ||
| Balance as of June 30, 2022 | ||||
| Deferred costs expensed | ( | ) | ||
| Balance as of September 30, 2022 | $ |
Note 4. Leases
The Company has two significant operating leases, one for its headquarters offices in Fairfax, Virginia and one for additional office space in Annapolis, Maryland. The leases both commenced in 2021 and have original lease terms ranging from
As of September 30, 2023 and December 31, 2022, the Company does not have any sales-type or direct financing leases.
Each of the Company’s operating lease assets represent its right to use an underlying asset for the lease term and the related lease liability represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement dates in determining the present value of lease payments. The operating lease assets also include any lease payments made and exclude lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreements include rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liabilities and operating lease assets. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.
The Company does not sublease any real estate to third parties.
As of September 30, 2023, our two operating leases had a weighted average remaining lease term of
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total lease payments | ||||
| Less: discount | ( | ) | ||
| Present value of lease liabilities | $ |
The total expense incurred related to its operating leases was $
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Note 5. Fair Value Measurements
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
| • | Level 1—Quoted prices in active markets for identical assets or liabilities; | ||
| • | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and | ||
| • | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Cash equivalents: | ||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||
As discussed in Note 2 above, in connection with its sale of GMI, the Company received contingent consideration that requires to GMDC to make annual payments equal to five percent (
The following table is a roll-forward of the Level 3 fair value measurements, which are not considered financial instruments.
| Fair value of contingent consideration: | ||||
| December 31, 2022 | $ | |||
| Additions | ||||
| March 31, 2023 | ||||
| Additions | ||||
| June 30, 2023 | ||||
| Settlements | ( | ) | ||
| September 30, 2023 | $ |
There were
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Note 6. Intangible Assets and Goodwill
Information regarding our intangible assets is as follows:
| Weighted Average Useful Life (Years) | Balance December 31, 2022 | Additions | Balance September 30, 2023 | |||||||||||||
| Intangible assets with estimated useful lives | ||||||||||||||||
| Customer relationships | $ | $ | - | $ | ||||||||||||
| Non-compete agreements | - | |||||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||||||
| Sub-total | ( | ) | ||||||||||||||
| Intangible assets with indefinite lives | ||||||||||||||||
| Trade names | Indefinite | - | ||||||||||||||
| Net identifiable intangible assets | $ | $ | ( | ) | $ | |||||||||||
| Weighted Average Useful Life (Years) | Balance December 31, 2021 | Additions | Balance September 30, 2022 | |||||||||||||
| Intangible assets with estimated useful lives | ||||||||||||||||
| Customer relationships | $ | $ | - | $ | ||||||||||||
| Non-compete agreements | - | |||||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||||||
| Sub-total | ( | ) | ||||||||||||||
| Intangible assets with indefinite lives | ||||||||||||||||
| Trade names | Indefinite | - | ||||||||||||||
| Net identifiable intangible assets | $ | $ | ( | ) | $ | |||||||||||
As of September 30, 2023, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
Note 7. Stock-Based Compensation
We have three stock-based compensation plans. The 2006 Stock Incentive Plan was adopted in 2006 (“2006 Plan”) and had options granted under it through April 12, 2016. The 2016 Stock Incentive Plan was adopted in 2016 (“2016 Plan”) and had options granted under it through November 15, 2021. On October 11, 2021, the Board of Directors approved the 2021 Stock Incentive Plan (“2021 Plan”) and on December 2, 2021, our shareholders approved the 2021 Plan.
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
The Company recognizes compensation costs on a straight-line basis over the service period of the awards. There were
| Three Months | Nine Months | |||||||
| Risk-free interest rate | ||||||||
| Dividend yield | % | 0 | % | |||||
| Expected term (years) | ||||||||
| Expected volatility |
Determining the assumptions for the expected term and volatility requires management to exercise significant judgment. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility to that of several public company issuers that operate within its market segment. The guideline companies’ volatility was increased by a size adjustment premium of
There were
Total compensation expense related to these plans was $
Note 8. Settlement of Litigation
On April 28, 2023, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”). On January 25, 2023, Gerald, as the result of the termination of his employment, filed a lawsuit against the Company for one year’s severance of $
The Company filed an answer denying Gerald’s claims. In addition, the Company filed a counterclaim seeking damages from Gerald associated with the acquisition transaction and arising under the Stock Purchase Agreement.
The principal terms of the Settlement Agreement were:
| (a) | All amounts due to Gerald related to the GMI acquisition, including the $ |
| (b) | The Company removed restrictions from |
| (c) | The Company paid Gerald $ |
| (d) | Gerald and the Company agreed to mutual general releases of one another. |
As a result of the settlement, the Company recognized a gain, net of expenses, of $
Note 9. Revolving Line of Credit and Notes Payable
On September 30, 2022, the Company entered a revolving line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $
On September 11, 2023, the Company and Summit entered a new line of credit agreement with the same terms as the preceding agreement, except that the maximum availability under the new line was reduced from $
| |
WaveDancer, Inc. | Form 10-Q September 30, 2023 |
Premium Financing Note Payable
The Company entered into a Premium Finance Agreement (“Premium Agreement”) on March 7, 2023, to purchase a one-year term directors and officers insurance policy. The Premium Agreement is for $
Note 10. Sales of Shares Under Common Stock Purchase Agreement
On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement” or "ELOC") and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, but not the obligation, to sell to B. Riley up to $15,000,000 of shares of the Company’s common stock, par value $
On August 11, 2022 and November 10, 2022, the Company issued to B. Riley
During the three months ended September 30, 2023, the Company sold
Note 11. Income Taxes
For the three and nine months ended September 30, 2022, the Company’s effective tax rate was
Note 12. Earnings Per Share
Basic earnings (loss) per share excludes dilution and is computed by dividing the loss available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss because the inclusion of such items would be antidilutive. The antidilutive effects of
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, 2022 (“Annual Report”) and in other filings with the Securities and Exchange Commission.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This list highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer. These risks include, among others, the following:
| ● |
We have had operating losses in three of each of the last four years and may not achieve or maintain profitability in the future. |
| ● |
A portion of our revenue is expected to be generated by sales to government entities, which are subject to a number of challenges and risks. |
| ● |
We face intense competition and could lose market share to our competitors, which could adversely affect our business, financial condition, and results of operations. |
| ● |
We rely on our management team and other key employees and will need additional personnel to grow our business, and the loss of one or more key employees or our inability to hire, integrate, train and retain qualified personnel, including members for our board of directors, could harm our business. |
| ● |
We are dependent on a few key customer contracts for a significant portion of our future revenue, and a significant reduction in services to one or more of these contracts would reduce our future revenue and harm our anticipated operating results. |
| ● |
We are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations. |
| ● |
We depend on computing infrastructure operated by Microsoft and other third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations. |
| ● |
Failure to comply with governmental laws and regulations could harm our business. |
| ● |
We are subject to risks associated with our strategic investments, and impairments in the value of our investments could negatively impact our financial results. |
| ● |
Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business. |
| ● |
The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members. |
| ● |
If we are not able to maintain and enhance our brand and our reputation as a provider of high-quality security solutions and services, our business and results of operations may be adversely affected. |
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A of our 2022 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
Our Business
Founded in 1979 as Information Analysis Incorporated, the Company changed its name to WaveDancer, Inc. and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.
On March 17, 2023, the Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). The Company’s retained interest in GMI of 24.9% was initially accounted for as an equity method investment. Subsequent to the sale the Company discontinued consolidating GMI and the Company has reflected GMI as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures throughout this Item 2 relate to the Company’s continuing operations. See Note 2 to the unaudited condensed consolidated financial statements for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation. On August 9, 2023, the Company sold its remaining 24.9% interest in GMI to GMDC. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. As of September 30, 2023 the Company has no equity method investment in GMDC and any other equity exposure to the GMI business.
The Company is an IT provider primarily for the benefit of federal government agencies. At present, we primarily apply our technology, services and experience to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, data analytics, and we are in the process of acquiring talent and expertise in developing cybersecurity and cloud services practices. Our focus is on enterprise IT solutions primarily relating to system modernization, cloud-based solutions and cybersecurity protection.
Since the Company’s inception, we have performed software development and conversion projects for over 100 commercial and government customers including, but not limited to, the Department of Agriculture, Department of Defense, Department of Education, Department of Homeland Security, Department of the Treasury, U.S. Small Business Administration, U.S. Army, U.S. Air Force, Department of Veterans Affairs, and General Dynamics Information Technology (formerly Computer Sciences Corporation, CSRA).
Modernization has been a core competency of the Company for over 20 years. We have modernized over 100 million lines of COBOL code for over 35 governmental and commercial customers. We maintain a pool of skilled COBOL programmers. This provides us with a competitive advantage as the labor pool of such programmers is shrinking as aging software professionals retire. Our business has also historically relied upon the reselling of applications, primarily for forms development.
Through our acquisition in April 2021 of Tellenger, Inc. (“Tellenger”), which is now a wholly owned subsidiary of the Company, we acquired competencies in web-based solutions and cybersecurity. Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics. We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud. We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized. It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the growth in the cybersecurity market.
In December 2021, we announced the reorganization of our entire professional services practice into Tellenger, and as a result, our professional services are contained in a single entity. Through Tellenger, we perform services such as business process re-engineering, cloud migrations, and Software-as-a-Service (“SaaS”) implementations on behalf of clients in the private and public sector with an aim to increase productivity, gain efficiencies, and achieve key performance indicators.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
Our Strategy
Our strategy is to grow our business organically as well as through acquisitions. Through the acquisition of Tellenger, Inc. in 2021, we began to reposition our legacy professional services business by allocating resources away from third-party product reselling and toward professional services, which management viewed as higher margin. To grow organically, we are focused on bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.
As discussed below under ‘Liquidity and Capital Resources’, the Company will need to raise additional capital to grow its business either organically or through acquisition. We are actively pursuing strategic alternatives which include the potential merger or sale of the Company. Any such transaction, if consummated, could fundamentally alter the Company’s business.
Results of Continuing Operations – Three Months Ended September 30, 2023 and 2022
Revenue
Total revenue was $1,967,277 for the three months ended September 30, 2023, compared with $2,306,379 in the prior year quarter, a decrease of $339,102, or 14.7%. The decrease in revenue was driven by our de-emphasis of third-party software sales which accounted for just 2.3% of our sales in the third quarter of 2023 as compared to 8.3% in the prior year quarter. Professional services revenue decreased by $192,712, or 9.1%, to $1,921,300 in the third quarter of 2023 from $2,114,012 in the third quarter of 2022. The decline in professional services revenue is driven primarily by one software modernization project where we had fewer resources deployed in the third quarter of 2023 as compared to the comparable prior year quarter based on current project deliverables.
Gross Profit
Gross profit decreased by $88,784 or 12.0%, to $649,812 for the three months ended September 30, 2023 as compared to $738,596 in the prior year quarter. The decrease in gross profit includes an increase from professional services of $5,533 and a decrease from third-party software sales of $94,317. Professional services gross profit as a percent of revenue declined from 37.5% to 35.8% due to a change in the mix of contracts generating revenue and the related billing rates resulting as well as increases in our costs of labor that outpaced billing rate increases.
Selling, General and Administrative Expenses
The following table shows the major elements of SG&A expenses for the three months ended September 30, 2023 and 2022 and the changes between periods:
| 2023 |
2022 |
Increase/ (Decrease) |
||||||||||
| Salaries and benefits |
$ | 500,301 | $ | 611,053 | $ | (110,752 | ) | |||||
| Stock based compensation |
180,816 | 398,319 | (217,503 | ) | ||||||||
| Legal and professional fees |
84,671 | 444,547 | (359,876 | ) | ||||||||
| Depreciation & Amortization |
56,644 | 53,597 | 3,047 | |||||||||
| Acquisition costs |
68,457 | 38,617 | 29,840 | |||||||||
| Software, IT and office expenses |
88,349 | 78,812 | 9,537 | |||||||||
| Governance and investor relations |
38,901 | 97,800 | (58,899 | ) | ||||||||
| Insurance |
89,338 | 81,979 | 7,359 | |||||||||
| Marketing and promotions |
460 | 29,629 | (29,169 | ) | ||||||||
| All other |
58,720 | 34,361 | 24,359 | |||||||||
| Total SG&A |
$ | 1,166,657 | $ | 1,868,714 | $ | (702,057 | ) | |||||
Operating Income from Continuing Operations
Our operating loss from continuing operations was $516,845 in the third quarter of 2023 as compared to a loss of $1,130,118 in the corresponding quarter in 2022, an improvement of $613,273, or 54.3%. The decrease in the operating loss from continuing operations is primarily the result of the decrease in SG&A expenses of $702,057, as shown above, partially offset by the decrease in gross profit of $88,784.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
Results of Discontinued Operations – Three Months Ended September 30, 2023 and 2022
The sale of GMI to GMDC occurred on March 17, 2023, and as a result, there was no activity for GMI in the third quarter of 2023. Following is the detail of discontinued operations for the third quarter of 2022:
| 2022 |
||||
| Revenue |
$ | - | ||
| Cost of revenue |
256,974 | |||
| Gross profit |
(256,974 | ) | ||
| Operating expenses - |
||||
| Salaries and benefits |
463,502 | |||
| Depreciation and amortization |
303,791 | |||
| Stock based compensation |
215,775 | |||
| Other operating expenses |
113,078 | |||
| Goodwill impairment |
2,254,624 | |||
| Loss before income tax benefit |
(3,607,744 | ) | ||
| Income tax benefit |
77,592 | |||
| Net income on discontinued operations |
$ | (3,530,152 | ) | |
Results of Continuing Operations – Nine Months Ended September 30, 2023 and 2022
Revenue
Total revenue was $6,152,022 for the nine months ended September 30, 2023, compared with $9,052,411 in the corresponding prior year period, a decrease of $2,900,389, or 32.0%. The decrease in revenue was driven primarily by our de-emphasis of third-party software sales which accounted for just 2.6% of our sales in the nine months ended September 30, 2023, as compared to 28.7% in the nine months ended September 30, 2022. Professional services revenue decreased by $465,819 to $5,992,715 for the nine months ended September 30, 2023, from $6,458,534 in the corresponding nine months of 2022. The decline in professional services revenue arose after the first quarter and is driven primarily by one software modernization project where we had fewer resources deployed in the second and third quarters of 2023 as compared to the comparable prior year quarters based on current project deliverables.
Gross Profit
Gross profit decreased by $327,284 or 14.0%, to $2,011,623 for the nine months ended September 30, 2023, as compared to $2,338,907 in the prior year. The decrease in gross profit includes a decrease from professional services of $161,513 and from third-party software sales of $165,771. Professional services gross profit as a percent of revenue declined slightly from 33.7% to 33.6% due primary to changes in the mix of contracts generating revenue and the related billing rates.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
Selling, General and Administrative Expenses
The following table shows the major elements of SG&A expenses for the nine months ended September 30, 2023 and 2022 and the changes between periods:
| 2023 |
2022 |
Increase/ (Decrease) |
||||||||||
| Salaries and benefits |
$ | 1,595,216 | $ | 2,022,252 | $ | (427,036 | ) | |||||
| Stock based compensation |
557,146 | 971,777 | (414,631 | ) | ||||||||
| Legal and professional fees |
672,582 | 1,467,736 | (795,154 | ) | ||||||||
| Depreciation & Amortization |
164,472 | 165,977 | (1,505 | ) | ||||||||
| Acquisition costs |
512,975 | 829,478 | (316,503 | ) | ||||||||
| Software, IT and office expenses |
267,693 | 327,210 | (59,517 | ) | ||||||||
| Governance and investor relations |
246,439 | 376,904 | (130,465 | ) | ||||||||
| Insurance |
253,384 | 188,931 | 64,453 | |||||||||
| Marketing and promotions |
1,328 | 102,996 | (101,668 | ) | ||||||||
| All other |
161,315 | 292,096 | (130,781 | ) | ||||||||
| Total SG&A |
$ | 4,432,550 | $ | 6,745,357 | $ | (2,312,807 | ) | |||||
Operating Loss from Continuing Operations
Our operating loss from continuing operations was $978,459 for nine months ended September 30, 2023 as compared to $4,406,450 for the comparable prior year period, a decrease in the loss of $3,427,991 or 77.8%. The decrease in the operating loss from continuing operations is primarily the result of the gain on litigation settlement of $1,442,468 along with the decrease in SG&A expenses of $2,312,807, as shown above, partially offset by the decrease in gross profit of $327,284.
Results of Discontinued Operations – Nine Months Ended September 30, 2023 and 2022
The sale of GMI to GMDC occurred on March 17, 2023, and as a result we had approximately two fewer weeks of costs and expenses for GMI for the first quarter of 2023 as compared to the first quarter of 2022, and no activity for the second and third quarters of 2023 as compared to full activity during the second and third quarters of 2022, as follows:
| Increase/ |
||||||||||||
| 2023 |
2022 |
(Decrease) |
||||||||||
| Revenue |
$ | - | $ | 566,862 | $ | (566,862 | ) | |||||
| Cost revenue |
74,223 | 1,118,301 | (1,044,078 | ) | ||||||||
| Gross profit |
(74,223 | ) | (551,439 | ) | 477,216 | |||||||
| Operating expenses - |
||||||||||||
| Salaries and benefits |
484,249 | 1,076,781 | (592,532 | ) | ||||||||
| Depreciation and amortization |
85,338 | 917,496 | (832,158 | ) | ||||||||
| Stock based compensation, before forfeitures |
65,487 | 268,283 | (202,796 | ) | ||||||||
| Forfeiture of stock options |
(407,322 | ) | - | (407,322 | ) | |||||||
| Other operating expenses |
134,633 | 702,534 | (567,901 | ) | ||||||||
| Change in fair value of contingent consideration |
- | (930,000 | ) | 930,000 | ||||||||
| Goodwill impairment |
- | 2,254,624 | (2,254,624 | ) | ||||||||
| Gain on disposal of business |
(100,615 | ) | - | (100,615 | ) | |||||||
| Loss before income tax benefit |
(335,993 | ) | (4,841,157 | ) | 4,505,164 | |||||||
| Income tax benefit |
- | 1,788,509 | (1,788,509 | ) | ||||||||
| Net income (loss) on discontinued operations |
$ | (335,993 | ) | $ | (3,052,648 | ) | $ | 2,716,655 | ||||
Critical Accounting Estimates
Our accounting policies are described in Note 1 of our consolidated financial statements – Organization and Summary of Significant Accounting Policies. Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 except for two new fair value measures for the first quarter of 2023:
1) the determination of the fair value of the contingent consideration receivable from GMDC, as discussed in Notes 2 and 5 to the accompanying consolidated financial statements, and
2) the determination of the initial fair value of our equity method investment in GMDC as of March 17, 2023.
The determination of the fair value of the contingent consideration is a recurring fair value measure at the end of each reporting period and includes significant judgmental inputs not observable in the market. Significant judgment was employed in determining the assumptions used in the determination of fair value as of March 31, 2023 and, accordingly, changes in assumptions could have a material impact on the increase or decrease in the fair value of contingent consideration recorded in any given period.
Equity Method Investment in GMDC
The Company received 993,768 common shares of GMDC representing 19.0 percent of the fully diluted capitalization. Prior to closing the acquisition on March 17 and through March 31, 2023, GMDC raised $3,000,000 by issuing Series A preferred shares at $1.00 per share representing 57.2 percent of the fully diluted capitalization. The Series A transaction was considered by the Company to be the most reliable indication of the fair value of total equity of GMDC. We utilized an option pricing model backsolve method (“OPM Backsolve”) to solve for the total equity value that results in a value of Series A equal to its issuance price, and to estimate the fair value of common shares. The significant inputs utilized in the OPM Backsolve include an estimated time to exit of four years, an estimated volatility of 75.0 percent, and a risk-free rate of 4.29 percent. A minority interest discount of 23.5% was also applied.
Liquidity and Capital Resources
On September 30, 2023, the Company had a net working capital of $537,375, including cash and cash equivalents of $877,198 and $500,000 outstanding under its line of credit with Summit bank. For the nine months ended September 30, 2023, we generated a net loss from continuing operations of $929,106. As discussed below, our ability to generate sufficient cash flows to meet our obligations for the twelve months following the issuance of these financial statements is dependent upon factors which are sufficiently outside of management’s control. Accordingly, there is substantial doubt about our ability to continue as a going concern.
The Company will need to raise additional capital to grow its business either organically or through acquisition. The Company is also pursuing strategic alternatives which include the potential merger or sale of the Company. There is no assurance that our efforts will result in any transactions or provide additional capital, which creates substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying financial statements are issued. We estimate that within twelve months from the date of issuing these financial statements, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements.
We used cash from continuing operations of $2,020,330 during the nine months ended September 30, 2023 and anticipate that over the twelve months from the date of these financial statements our operating activities may use as much as $1.0 million to $1.5 million.
On August 9, 2023, the Company received $1,400,000 of cash from GMDC from: 1) the sale of the common stock of GMDC held by the Company; and, 2) in satisfaction of the contingent consideration receivable due from GMDC to the Company. On August 9, 2023, the Company repaid $500,000 on the Summit line of credit and has no further borrowing capacity thereunder. The line of credit expires on January 16, 2024. The Company has no commitments for capital spending nor any plans for material capital expenditures.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and people performing similar functions, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2023 (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, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Because of the inherent limitations in all control systems, no control system can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of a person, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Notwithstanding these limitations, we believe that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
| Item 1. | Legal Proceedings |
There are no pending legal proceedings to which we are a party or to which any of our property is subject and, to the best of our knowledge, no such actions against us are contemplated or threatened.
| Risk Factors |
“Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2022, as amended, includes a discussion of our risk factors. There have been no material changes from the risk factors described in our annual report on Form 10-K for the year ended December 31, 2022.
| Unregistered Sales of Equity Securities and Use of Proceeds |
|
| On September 27, 2023, the Company sold 35,000 shares of common stock at a price of $5.00 per share in a private placement offering from which it raised aggregate gross proceeds of $175,000. The Company relied upon Rule 506(b) of Regulation D in issuing these shares. No placement fees or commissions were paid in connection with the offering. The proceeds are for use for general corporate purposes. |
| Defaults Upon Senior Securities |
|
| None. |
| Mine Safety Disclosures |
|
| Not applicable |
| Other Information |
|
| None. |
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
| 31.1 |
Filed with this Form 10-Q |
||
| 31.2 |
Filed with this Form 10-Q |
||
| 32.1 |
Filed with this Form 10-Q |
||
| 32.2 |
Filed with this Form 10-Q |
||
| 101.INS |
Inline XBRL Instance Document |
Filed with this Form 10-Q |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
||
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
||
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
||
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
||
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
||
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
| WaveDancer, Inc. |
Form 10-Q September 30, 2023 |
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WaveDancer, Inc. (Registrant) |
|||||
| Date: | November 13, 2023 | By: | /s/ G. James Benoit, Jr. | ||
| G. James Benoit, | |||||
| Chief Executive Officer | |||||
| Date: | November 13, 2023 | By: | /s/ Timothy G. Hannon | ||
| Timothy G. Hannon, | |||||
| Chief Financial Officer | |||||