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Table of Contents



 

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, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-41092

pic1.jpg

WaveDancer, Inc.

(Exact name of registrant as specified in its charter)

  

Delaware

54-1167364

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

12015 Lee Jackson Memorial Highway, Suite 210

 

Fairfax, Virginia

22033

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (703) 383-3000

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

WAVD

 

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes No ☑

 

Number of shares outstanding by each class of common stock, as of November 7, 2023:

 

Common Stock, $0.001 par value – 2,013,180 shares outstanding

 

This document is also available through our website at http://ir.wavedancer.com/.

 



 

    

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

 

 

WAVEDANCER, INC.

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

4

     
 

Condensed Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022

5

     
 

Condensed Consolidated Statements of Operations for the nine months ended September 30, 2023 and 2022

6

     
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022

7

     
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022

8

     
 

Notes to Condensed Consolidated Financial Statements

9

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

20
     

Item 4.

Controls and Procedures

26
     

PART II.

OTHER INFORMATION

27
     

Item 1.

Legal Proceedings

27
     

Item 1A.

Risk Factors

27
     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

27
     

Item 3.

Defaults Upon Senior Securities

27
     

Item 4.

Mine Safety Disclosures

27
     

Item 5.

Other Information

27
     

Item 6.

Exhibits

28
     

SIGNATURES

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

 

WAVEDANCER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  

September 30, 2023

  

December 31, 2022

 

ASSETS

        

Current assets

        

Cash and cash equivalents

 $877,198  $731,081 

Accounts receivable

  1,479,780   1,629,559 

Prepaid expenses and other current assets

  363,668   442,445 

Total current assets

  2,720,646   2,803,085 
         

Intangible assets, net of accumulated amortization of $440,400 and $308,217, respectively

  1,049,600   1,181,783 

Goodwill

  1,125,101   1,125,101 

Right-of-use operating lease asset

  279,132   376,104 

Property and equipment, net of accumulated depreciation and amortization of $423,916 and $391,628, respectively

  66,703   98,991 

Other assets

  20,623   79,305 

Assets held for sale

  -   2,316,845 

Total assets

 $5,261,805  $7,981,214 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Accounts payable

 $495,895  $573,789 

Revolving line of credit

  500,000   425,000 

Premium financing note payable

  94,071   - 

Accrued payroll and related liabilities

  604,079   676,796 

Commissions payable

  24,296   125,033 

Income taxes payable

  3,101   3,101 

Other accrued liabilities

  217,108   283,497 

Contract liabilities

  26,026   182,756 

Operating lease liabilities - current

  218,695   203,342 

Deferred acquisition consideration

  -   1,415,098 

Total current liabilities

  2,183,271   3,888,412 
         

Operating lease liabilities - non-current

  134,790   303,778 

Deferred tax liabilities, net

  59,121   59,121 

Total liabilities

  2,377,182   4,251,311 
         

Stockholders' equity

        

Common stock, $0.001 par value 100,000,000 shares authorized; 2,148,291 and 2,083,860 shares issued, 1,980,986 and 1,916,555 shares outstanding as of September 30, 2023 and December 31, 2022, respectively

  2,148   2,084 

Additional paid-in capital

  36,303,586   35,883,831 

Accumulated deficit

  (32,455,900)  (31,190,801)

Treasury stock, 167,305 shares at cost, as of September 30, 2023 and December 31, 2022

  (965,211)  (965,211)

Total stockholders' equity

  2,884,623   3,729,903 

Total liabilities and stockholders' equity

 $5,261,805  $7,981,214 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Three Months Ended September 30,

 
  

2023

  

2022

 

Revenues

        

Professional fees

 $1,921,300  $2,114,012 

Software sales

  45,977   192,367 

Total revenues

  1,967,277   2,306,379 
         

Cost of revenues

        

Cost of professional fees

  1,268,820   1,467,065 

Cost of software sales

  48,645   100,718 

Total cost of revenues excluding depreciation and amortization

  1,317,465   1,567,783 
         

Gross profit

  649,812   738,596 
         

Selling, general and administrative expenses

  1,166,657   1,868,714 
         

Operating income (loss) from continuing operations

  (516,845)  (1,130,118)
         

Gain on sale of equity investment and settlement of contingent consideration receivable

  382,525   - 

Other income (expense), net

  3,113   3,188 

Interest expense

  (18,725)  (20,437)
         

Income (loss) from continuing operations before income taxes

  (149,932)  (1,147,367)
         

Provision for income taxes

  -   23,000 
         

Net income (loss) from continuing operations

  (149,932)  (1,170,367)
         

Loss from discontinued operations

  -   (3,530,152)
         

Net income (loss)

 $(149,932) $(4,700,519)
         

Basic and diluted loss per share from continuing operations

 $(0.08) $(0.64)

Basic and diluted loss per share from discontinued operations

  -   (1.92)

Basic and diluted net loss per share

 $(0.08) $(2.56)
         

Weighted average common shares outstanding

        

Basic and diluted

  1,939,790   1,838,213 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Revenues

        

Professional fees

 $5,992,715  $6,458,534 

Software sales

  159,307   2,593,877 

Total revenues

  6,152,022   9,052,411 
         

Cost of revenues

        

Cost of professional fees

  3,979,059   4,283,365 

Cost of software sales

  161,340   2,430,139 

Total cost of revenues excluding depreciation and amortization

  4,140,399   6,713,504 
         

Gross profit

  2,011,623   2,338,907 
         

Selling, general and administrative expenses

  4,432,550   6,745,357 

Gain on litigation settlement

  (1,442,468)  - 
         

Operating loss from continuing operations

  (978,459)  (4,406,450)
         

Gain on sale of equity investment and settlement of contingent consideration receivable

  382,525   - 

Other income, net

  3,335   3,977 

Interest expense

  (90,982)  (59,574)
         

Loss from continuing operations before income taxes and equity in net loss of affiliate

  (683,581)  (4,462,047)
         

Provision for income taxes

  -   789,573 
         

Net loss from continuing operations before equity in net loss of affiliate

  (683,581)  (5,251,620)
         

Equity in net loss of affiliate

  (245,525)  - 
         

Net loss from continuing operations

  (929,106)  (5,251,620)
         

Income (loss) from discontinued operations

  (335,993)  (3,052,648)
         

Net loss

 $(1,265,099) $(8,304,268)
         

Basic and diluted loss per share from continuing operations

 $(0.48) $(2.97)

Basic and diluted loss per share from discontinued operations

 $(0.17) $(1.73)

Basic and diluted net loss per share

 $(0.65) $(4.70)
         

Weighted average common shares outstanding

        

Basic and diluted

  1,929,067   1,768,853 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Cash flows from operating activities

        

Net loss

 $(1,265,099) $(8,304,268)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Loss from discontinued operations

  335,993   3,052,648 

Depreciation and amortization

  164,471   165,770 

Stock-based compensation

  557,147   1,187,552 

Deferred income tax expense

  -   775,257 

Amortization of right-of-use assets

  96,972   136,441 

Accretion of deferred acquisition consideration

  27,370   59,467 

Gain on litigation settlement

  (1,442,468)  - 

Gain on sale of equity investment and settlement of contingent consideration receivable

  (382,525)  - 

Equity in loss of affiliate

  245,525   - 

Changes in operating assets and liabilities:

        

Accounts receivable

  149,779   132,688 

Prepaid expenses and other current assets

  61,925   84,842 

Other assets

  58,682   - 

Accounts payable

  (77,894)  (422,939)

Contract liabilities

  (156,730)  (149,149)

Accrued payroll and related liabilities and other accrued liabilities

  (139,106)  653,786 

Operating lease liability

  (153,635)  (142,420)

Commissions payable

  (100,737)  846 

Cash used in operating activities of continuing operations

  (2,020,330)  (2,769,479)

Cash used in operating activities of discontinued operations

  (693,106)  (2,330,754)

Net cash used in operating activities

  (2,713,436)  (5,100,233)
         

Cash flows from investing activities

        

Acquisition of property and equipment

  -   (234,060)

Proceeds from sale of equity investment and settlement of contingent consideration receivable

  1,400,000   - 

Proceeds from disposal of business

  935,974   - 

Net cash provided by (used in) investing activities

  2,335,974   (234,060)
         

Cash flows from financing activities

        

Borrowings under revolving line of credit

  575,000   - 

Repayments under revolving line of credit

  (500,000)  - 

Premium financing borrowings

  305,759   - 

Premium financing repayments

  (211,688)  - 

Proceeds from issuance of stock

  347,108   1,887,000 

Proceeds from exercise of stock options

  7,400   37,642 

Net cash provided by financing activities

  523,579   1,924,642 
         

Net increase (decrease) in cash and cash equivalents

  146,117   (3,409,651)
         

Cash and cash equivalents, beginning of period

  731,081   4,931,302 

Cash and cash equivalents, end of period

 $877,198  $1,521,651 
         

Supplemental cash flow Information

        

Interest paid

 $18,356  $1,002 

Non-cash investing and financing activities:

        

Non-cash proceeds on disposal of business

 $1,263,000  $- 

Value of common stock issued in connection with common stock purchase agreement

 $-  $112,500 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

 

  

Shares of

                     
  

Common

      

Additional

             
  

Stock

  

Common

  

Paid-In

  

Accumulated

  

Treasury

     
  

Issued

  

Stock

  

Capital

  

Deficit

  

Stock

  

Total

 

Balances at December 31, 2022

  2,083,860  $2,084  $35,883,831  $(31,190,801) $(965,211) $3,729,903 

Net loss

  -   -   -   (1,349,952)  -   (1,349,952)

Stock option compensation

  -   -   353,658   -   -   353,658 

Forfeiture of stock options on disposal of business (Note 2)

  -   -   (407,322)  -   -   (407,322)

Stock issued

  7,431   7   56,259   -   -   56,266 

Amortization of stock issue costs

  -   -   (18,635)  -   -   (18,635)

Issuance of stock from exercise of options

  2,000   2   7,398   -   -   7,400 

Balances at March 31, 2023

  2,093,291   2,093   35,875,189   (32,540,753)  (965,211)  2,371,318 

Net income

  -   -   -   234,785   -   234,785 

Stock option compensation

  -   -   88,159   -   -   88,159 

Amortization of stock issue costs

  -   -   (76,673)  -   -   (76,673)

Balances at June 30, 2023

  2,093,291   2,093   35,886,675   (32,305,968)  (965,211)  2,617,589 

Net loss

  -   -   -   (149,932)  -   (149,932)

Stock option compensation

  -   -   180,816   -   -   180,816 

Stock issued

  55,000   55   290,787   -   -   290,842 

Amortization of stock issue costs

  -   -   (54,692)  -   -   (54,692)

Balances at September 30, 2023

  2,148,291  $2,148  $36,303,586  $(32,455,900) $(965,211) $2,884,623 

 

 

  

Shares of

                     
  

Common

      

Additional

             
  

Stock

  

Common

  

Paid-In

  

Accumulated

  

Treasury

     
  

Issued

  

Stock

  

Capital

  

Deficit

  

Stock

  

Total

 

Balances at December 31, 2021

  1,888,231  $1,888  $31,806,458  $(13,436,963) $(930,211) $17,441,172 

Net loss

  -   -   -   (2,078,307)  -   (2,078,307)

Stock option compensation

  -   -   312,176   -   -   312,176 

Issuance of stock from exercise of options

  10,500   11   26,788   -   -   26,799 

Balances at March 31, 2022

  1,898,731   1,899   32,145,422   (15,515,270)  (930,211)  15,701,840 

Net loss

  -   -   -   (1,525,442)  -   (1,525,442)

Stock option compensation

  -   -   529,565   -   -   529,565 

Issuance of stock from exercise of options

  5,200   5   8,387   -   -   8,392 

Balances at June 30, 2022

  1,903,931   1,904   32,683,374   (17,040,712)  (930,211)  14,714,355 

Net loss

  -   -   -   (4,700,519)  -   (4,700,519)

Stock option compensation

  -   -   614,094   -   -   614,094 

Stock issued

  166,300   166   1,999,334   -   -   1,999,500 

Issuance of stock from exercise of options

  10,700   11   37,440   -   (35,000)  2,451 

Balances at September 30, 2022

  2,080,931  $2,081  $35,334,242  $(21,741,231) $(965,211) $12,629,881 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

WAVEDANCER, INC.

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 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). Subsequent to the sale, the Company discontinued consolidating GMI and the Company has reflected GMI as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations. See Note 2 for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation.

 

Prior to March 17, 2023, we had two operating segments: Tellenger and Blockchain SCM. Given the classification of GMI, which comprised all of the material operations of the Blockchain SCM segment, as a discontinued operation (see Note 2). After March 17, 2023, the Company manages its business as one reportable operating segment.

 

Liquidity and Going Concern

 

During the nine months ended September 30, 2023, the Company generated an operating loss from continuing operations of $978,459. As of September 30, 2023, the Company had working capital of $537,375 including cash and cash equivalents of $877,198. We estimate that over the twelve months from the date of these financial statements our operating activities may use as much as $1.0 million to $1.5 million of cash. On August 2, 2023, the Company realized $118,655 of cash proceeds from the sale of 20,000 shares of common stock, and on August 9, 2023, the Company received $1,400,000 of cash from the sale of its remaining equity interest in GMDC and its contingent consideration receivable from GMDC. On August 9, 2023, the Company repaid $500,000 on the Summit line of credit and has no further borrowing capacity thereunder. On September 29, 2023, the Company issued 35,000 shares of its common stock to its chairman and CEO for $175,000 of cash. The transaction was approved by the board of directors and was at a premium to the trading price on the date of the transaction. We estimate that within twelve months from the issuance of these financial statements, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements as well as to grow its business either organically or through acquisitions. The Company is evaluating strategic alternatives which include the potential merger or sale of the Company. There is no assurance that such activities will result in any transactions or provide additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying unaudited condensed consolidated financial statements are issued.

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

Reverse Stock Split

 

On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $0.001 per share, (the “Common Stock”) at a ratio of one-for-ten (the “Reverse Stock Split”). The Reverse Stock split affected all issued common stock and options and warrants to acquire common stock. No fractional shares were issued as a result of the reverse split and any fractional share otherwise issuable were rounded up to the nearest whole number. All shares and per share amounts in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split. Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834 pre-split shares to approximately 1,980,983 post-split shares, before finalizing the rounding of fractional shares. As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten. 

 

Unaudited Interim Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 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.

 

9

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 24.9% of the equity of GMDC. See Note 2 for further information about the sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation. The Company accounted for its investment in GMDC in accordance with the equity method from March 17, 2023 through August 9, 2023. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. As of September 30, 2023 the Company has no equity investment in GMDC and any other equity exposure to the GMI business.

 

Use of Estimates

 

Preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; fair values of financial instruments, intangible assets, and goodwill, including the underlying estimates of cash flows of our products and reporting unit; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, and the valuation of deferred tax assets and liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, and the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Concentration of Credit Risk

 

During the three months ended September 30, 2023, the Company’s prime contracts with U.S. government agencies represented 8.3% of revenue and subcontracts under federal procurements represented 90.6% of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 29.3%, 19.9%, and 18.6% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 56.6% of the Company’s revenue in aggregate.

 

During the three months ended September 30, 2022, the Company’s prime contracts with U.S. government agencies represented 11.4% of revenue and subcontracts under federal procurements represented 82.8% of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 30.9%, 21.3%, and 13.0% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 49.9% of the Company’s revenue in aggregate.

 

During the nine months ended September 30, 2023, the Company’s prime contracts with U.S. government agencies represented 9.1% of revenue and subcontracts under federal procurements represented 89.3% of revenue. The terms of these subcontracts vary from one to five years. Three subcontracts under federal procurements represented 30.3%, 21.1%, and 16.6% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 54.5% of the Company’s revenue in aggregate.

 

During the nine months ended September 30, 2022, the Company’s prime contracts with U.S. government agencies represented 28.6% of revenue and subcontracts under federal procurements represented 67.8% of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 27.4%, 16.5%, and 10.5% of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 41.4% of the Company’s revenue in aggregate.

 

10

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

The Company sold third-party software and maintenance contracts under agreements with one major supplier, accounting for 9.7% and 11.8% of total revenue during the three- and nine-months ended September 30, 2022, respectively.

 

As of September 30, 2023, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 42.2% and 17.2% of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts represented 69.8% of the Company’s outstanding accounts receivable in aggregate.

 

As of September 30, 2022, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 46.5% and 13.6% of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts represented 66.8% of the Company’s outstanding accounts receivable in aggregate.

 

 

Note 2.         Sale and Deconsolidation of GMI and Discontinued Operations

 

On March 17, 2023, the Company entered in and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC, a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc. In exchange for this sale, the Company received common shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred stock referenced below, 24.9% interest in the purchaser, cash consideration of $935,974 and contingent annual payments equal to five percent (5%) of the purchaser’s GAAP based revenue through December 31, 2029 attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. Payments will be calculated for each calendar year and are due by March 31 of the following year. GMDC also paid the Company $133,148 for certain of GMI’s operating expenses for the period beginning March 1, 2023 through March 17, 2023.

 

The equity interest StealthPoint and other GMDC investors received is in the form of Series A non-participating convertible preferred stock having a one-times (1x) liquidation preference and no cumulative dividends. In addition, the Company and GMDC entered into a transition services agreement whereby the Company continues to provide certain administrative services for GMI. The value of these services is estimated to be $65,000 which was paid by GMDC at closing and is not subject to adjustment. The $65,000 prepayment is included in other accrued liabilities on the unaudited condensed consolidated balance sheet as of March 31, 2023 and has been amortized as a reduction to selling, general and administrative expenses ratably over the three-month period ending June 30, 2023 after which time no further transition services were provided. The total cash received at closing was $1,000,974. The Company also has the right to appoint a representative to GMDC’s board of directors and a right to co-invest in the anticipated Series B preferred stock financing round which GMDC intends to consummate in the future. The Company recognized a gain on the sale of GMI of $100,615 in the first quarter of 2023, which was included in net loss on discontinued operations in the unaudited condensed consolidated statement of operations, and immediately deconsolidated GMI upon its sale. GMDC was not a related party of the Company at the time of its purchase of GMI. Subsequent to our deconsolidation of GMI, GMI and GMDC are related parties of the Company due to our equity interest in GMDC.

 

The components of the consideration received and the methods for determining their fair values as of March 17, 2023 were as follows:

 

Consideration

 

Amount

 

Description and Valuation Methodology

Cash at closing

 $935,974 

Cash received at closing less estimated value of transition services to be provided.

Cash after closing

  133,148 

Actual cash operating expenses of GMI from March 1 through March 17, 2023 (prior to the transfer of GMI to GMDC).

GMDC common stock

  581,000 

Based on Series A preferred stock issuance to other GMDC investors for $3,000,000 in cash and application of an option pricing model backsolve method and a minority interest discount to estimate the fair value of the common shares of GMDC.

Contingent payments

  682,000 

Estimated by applying a discount rate of 40.8% to the projected cash receipts expected over the 7-year horizon. (See Note 5).

Total consideration

 $2,332,122  

 

The GMDC common stock was accounted for as an equity method investment from March 17, 2023 and through its sale on August 9, 2023. During this period, a net loss of $245,525 in the equity investment was recorded. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. The contingent consideration receivable of $682,000 was settled in cash for $1,000,000 and a gain of $318,000 was recognized during the three months ended September 30, 2023 (see Note 5).

 

11

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

The following table sets forth details of net earnings from discontinued operations for the nine months ended September 30, 2023 and 2022, which reflects the results of the Blockchain SCM operating segment through the date our controlling financial interest in it was sold – March 17, 2023 (See Note 1).

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Revenue

 $-  $-  $-  $566,862 

Cost of revenue

  -   256,974   74,223   1,118,301 

Excess of contract costs over revenue

  -   (256,974)  (74,223)  (551,439)

Operating expenses -

                

Salaries and benefits

  -   463,502   484,249   1,076,781 

Intangibles amortization

  -   303,791   85,338   917,496 

Stock based compensation, before forfeitures

  -   215,775   65,487   268,283 

Forfeiture of stock options

  -   -   (407,322)  - 

Other operating expenses

  -   113,078   134,633   702,534 

Change in fair value of contingent consideration

  -   -   -   (930,000)

Goodwill impairment

  -   2,254,624      2,254,624 

Gain on disposal of business

  -   -   (100,615)  - 

Loss before income tax benefit

  -   (3,607,744)  (335,993)  (4,841,157)

Income tax benefit

  -   77,592   -   1,788,509 

Net loss on discontinued operations

 $-  $(3,530,152) $(335,993) $(3,052,648)

 

During the nine months ended September 30, 2023, there was a total of 715,000 unvested stock options forfeited by GMI employees, including 527,500 forfeited by employees who resigned from WaveDancer, on the Sale Date, and were offered employment by GMDC. Stock-based compensation expense of $407,322, previously recognized for these forfeited options, was taken back into income in March 2023.

 

The following table presents the components of the assets of our discontinued operations that were classified as held for sale as of December 31, 2022. As of March 31, 2023, GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet.

 

  

December 31,

 
  

2022

 

Customer relationship intangible asset, net of amortization

 $1,057,722 

Technology intangible asset, net of amortization

  760,698 

Capitalized software development costs

  498,425 

Total assets of discontinued operations

 $2,316,845 

 

 

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.

 

12

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

 $1,714,509   87.2% $1,896,829   82.2%

Services fixed price over time

  102,402   5.2%  58,965   2.6%

Services combination

  33,090   1.7%  50,440   2.2%

Services fixed price per unit

  71,299   3.6%  107,778   4.7%

Third-party software

  45,977   2.3%  59,076   2.6%

Software support & maintenance

  -   0.0%  44,804   1.9%

Incentive payments

  -   0.0%  88,487   3.8%

Total revenue

 $1,967,277   100.0% $2,306,379   100.0%

 

13

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

  

Nine Months Ended September 30,

 
  

2023

  

2022

 

Contract Type

 

Amount

  

Percentage

  

Amount

  

Percentage

 

Services time & materials

 $5,314,845   86.4% $5,963,361   65.9%

Services fixed price over time

  307,206   5.0%  161,273   1.8%

Services combination

  99,270   1.6%  80,520   0.9%

Services fixed price per unit

  271,394   4.4%  253,379   2.8%

Third-party software

  159,307   2.6%  2,345,884   25.9%

Software support & maintenance

  -   0.0%  142,891   1.6%

Incentive payments

  -   0.0%  105,103   1.1%

Total revenue

 $6,152,022   100.0% $9,052,411   100.0%

 

Contract Balances

 

Accounts Receivable

 

Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized as of  September 30, 2023 and December 31, 2022.

 

Accounts receivable as of  September 30, 2023 and December 31, 2022, consist of the following:

 

  

September 30, 2023

  

December 31, 2022

 

Billed federal government

 $1,456,519  $1,573,407 

Billed commercial and local government

  22,000   56,152 

Unbilled receivables

  1,261   - 

Accounts receivable

 $1,479,780  $1,629,559 

 

Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.

 

Contract Liabilities

 

Contract liabilities consist of amounts that have been invoiced and for which the Company has 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

 $182,756 

Contract liabilities added

  - 

Revenue recognized

  (55,665)

Balance at March 31, 2023

  127,091 

Contract liabilities added

  - 

Revenue recognized

  (55,088)

Balance at June 30, 2023

  72,003 

Contract liabilities added

  - 

Revenue recognized

  (45,977)

Balance at September 30, 2023

 $26,026 

 

 

Balance at December 31, 2021

 $186,835 

Contract liabilities added

  19,280 

Revenue recognized

  (56,423)

Balance at March 31, 2022

  149,692 

Contract liabilities added

  87,612 

Revenue recognized

  (71,461)

Balance as of June 30, 2022

  165,843 

Contract liabilities added

  2,491 

Revenue recognized

  (130,648)

Balance at September 30, 2022

 $37,686 

 

Revenues recognized during the three months ended September 30, 2023 and 2022, from the balances as of  December 31, 2022 and 2021, were $45,977 and $48,708, respectively. Revenues recognized during the nine months ended September 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $156,730 and $160,809, respectively.

 

14

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 $0 of deferred costs of revenue. Changes in deferred costs of revenue balances for the nine months ended September 30, 2022, are as follows:

 

Balance at December 31, 2021

 $154,218 

Deferred costs added

  2,800 

Deferred costs expensed

  (55,362)

Balance at March 31, 2022

  101,656 

Deferred costs expensed

  (53,434)

Balance as of June 30, 2022

  48,222 

Deferred costs expensed

  (48,222)

Balance as of September 30, 2022

 $- 

 

 

Note 4.         Leases

 

The Company has two significant operating leases, one for its headquarters offices in Fairfax, Virginia and one for additional office space in Annapolis, Maryland. The leases both commenced in 2021 and have original lease terms ranging from 37 to 67 months and rental rates escalate by approximately 2.5% annually under both leases. The Company determines if an arrangement is a lease at inception.

 

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 28 months and a weighted average discount rate of 5.1%. Future lease payments under operating leases as of September 30, 2023, were as follows:

 

2023

  58,041 

2024

  174,721 

2025

  74,804 

2026

  70,220 

Total lease payments

  377,786 

Less: discount

  (24,301)

Present value of lease liabilities

 $353,485 

 

The total expense incurred related to its operating leases was $38,053 and $53,560 for the three months ended September 30, 2023 and 2022, respectively, and $118,567 and $164,281 for the nine months ended September 30, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

 

15

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

 $809,997  $-  $-  $809,997 

 

  

December 31, 2022

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 

Cash equivalents:

                

Money market funds

 $58,242  $-  $-  $58,242 

 

As discussed in Note 2 above, in connection with its sale of GMI, the Company received contingent consideration that requires to GMDC to make annual payments equal to five percent (5%) of the purchaser’s GAAP based revenue through December 31, 2029, up to a cumulative maximum of $4,000,000, attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. The fair value of the contingent consideration was estimated based on GMDC’s forecast of revenue, the estimated after-tax payments to the Company, and the present value of the after-tax payments based on discount rate that reflects the risk of achieving the timing and amounts of forecasted payments. The significant inputs utilized in estimating the fair value of contingent consideration include the forecast of revenues, the income tax rate of 27.0 percent, and the discount rate of 40.75 percent. On August 9, 2023, the Company and GMDC agreed to terminate all rights and obligations with respect to the calculation and payment of future contingent payments from GMDC to the Company in exchange for the payment of $1,000,000 cash by GMDC to the Company, resulting in a gain of $318,000.

 

The following table is a roll-forward of the Level 3 fair value measurements, which are not considered financial instruments.

 

Fair value of contingent consideration:

    

December 31, 2022

 $- 

Additions

  682,000 

March 31, 2023

  682,000 

Additions

  - 

June 30, 2023

  682,000 

Settlements

  (682,000)

September 30, 2023

 $- 

 

There were no unrealized gains or losses recognized in income for the three- or nine-month periods ended September 30, 2023.

 

16

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

 

Note 6.         Intangible Assets and Goodwill

 

Information regarding our intangible assets is as follows:

 

  

Weighted Average Useful Life (Years)

  

Balance December 31, 2022

  

Additions

  

Balance September 30, 2023

 

Intangible assets with estimated useful lives

                

Customer relationships

  8.0  $1,090,000  $-  $1,090,000 

Non-compete agreements

  3.0   120,000   -   120,000 

Accumulated amortization

      (308,217)  (132,183)  (440,400)

Sub-total

      901,783   (132,183)  769,600 

Intangible assets with indefinite lives

                

Trade names

  

Indefinite

   280,000   -   280,000 

Net identifiable intangible assets

     $1,181,783  $(132,183) $1,049,600 

 

  

Weighted Average Useful Life (Years)

  

Balance December 31, 2021

  

Additions

  

Balance September 30, 2022

 

Intangible assets with estimated useful lives

                

Customer relationships

  8.0  $1,090,000  $-  $1,090,000 

Non-compete agreements

  3.0   120,000   -   120,000 

Accumulated amortization

      (131,973)  (132,183)  (264,156)

Sub-total

      1,078,027   (132,183)  945,844 

Intangible assets with indefinite lives

                

Trade names

  

Indefinite

   280,000   -   280,000 

Net identifiable intangible assets

     $1,358,027  $(132,183) $1,225,844 

 

As of September 30, 2023, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows:

 

2023

 $44,061 

2024

  146,307 

2025

  136,248 

2026

  136,248 

2027

  136,248 

Thereafter

  170,488 

Total

 $769,600 

 

 

Note 7.         Stock-Based Compensation

 

We have three stock-based compensation plans. The 2006 Stock Incentive Plan was adopted in 2006 (“2006 Plan”) and had options granted under it through April 12, 2016. 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.

 

17

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 no option awards granted in the three and nine months ended September 30, 2023. Fair values of option awards granted in the three and nine months ended September 30, 2022, were estimated using the Black-Scholes option pricing model under the following assumptions:

 

   Three Months   Nine Months 

Risk-free interest rate

  2.85% - 2.90%   1.91% - 2.90% 

Dividend yield

  0%  0%

Expected term (years)

  3.25 - 6.00   3.25 - 6.00 

Expected volatility

  45.9% - 48.1%   45.8% - 48.5% 

 

Determining the assumptions for the expected term and volatility requires management to exercise significant judgment. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility to that of several public company issuers that operate within its market segment. The guideline companies’ volatility was increased by a size adjustment premium of 30% to compensate for the difference in size between the guideline companies and the Company in its calculation.

 

There were 53,500 options with grant date fair values totaling $168,900, and 131,200 options with grant date fair values totaling $1,639,870, granted during the three and nine months ended September 30, 2022, respectively. There were zero and 10,700 options exercised during the three months ended September 30, 2023 and 2022, respectively. There were 2,000 and 26,400 options exercised during the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was $431,067 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plans; that cost is expected to be recognized over a weighted-average period of 11 months.

 

Total compensation expense related to these plans was $180,816 and $398,319 for the three months ended September 30, 2023 and 2022, respectively, and $557,146 and $971,777 for the nine months ended September 30, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

 

 

Note 8.         Settlement of Litigation

 

On April 28, 2023, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”). On January 25, 2023, Gerald, as the result of the termination of his employment, filed a lawsuit against the Company for one year’s severance of $150,000 and benefits to which he claimed he was entitled under his employment agreement with the Company. He had also claimed an anticipatory breach of the payment of $1,500,000 of deferred consideration otherwise due him on December 10, 2023, under the Stock Purchase Agreement between him and the Company and an anticipatory breach to release from escrow 43,648 shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement.

 

The Company filed an answer denying Gerald’s claims. In addition, the Company filed a counterclaim seeking damages from Gerald associated with the acquisition transaction and arising under the Stock Purchase Agreement.

 

The principal terms of the Settlement Agreement were:

 

 

(a)

All amounts due to Gerald related to the GMI acquisition, including the $1,500,000 of deferred consideration, were deemed satisfied and such obligations were extinguished;

 

 

(b)

The Company removed restrictions from 43,648 shares of the Company’s common stock;

 

 

(c)

The Company paid Gerald $25,000 as reimbursement for legal costs; and,

 

 

(d)

Gerald and the Company agreed to mutual general releases of one another.

 

As a result of the settlement, the Company recognized a gain, net of expenses, of $1,442,468 in the second quarter of 2023.

 

 

Note 9.         Revolving Line of Credit and Notes Payable

 

On September 30, 2022, the Company entered a revolving line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $1,000,000 at a variable interest rate equal to the prime rate as published in The Wall Street Journal, with a minimum rate of 3.99% and a maximum rate of 20.00%, and subject to a borrowing base calculated using outstanding accounts receivable. Borrowings under the line of credit are secured by the assets of the Company. There were no borrowings and $500,000 of repayments during the three months ended September 30, 2023, and there were $575,000 of borrowings and $500,000 of repayments during the nine months ended September 30, 2023. This line of credit expired on August 16, 2023.

 

On September 11, 2023, the Company and Summit entered a new line of credit agreement with the same terms as the preceding agreement, except that the maximum availability under the new line was reduced from $1,000,000 to $500,000. As of September 30, 2023, there was $500,000 outstanding and no borrowing availability under this line of credit. The line of credit expires on January 16, 2024.

 

18

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

Premium Financing Note Payable

 

The Company entered into a Premium Finance Agreement (“Premium Agreement”) on March 7, 2023, to purchase a one-year term directors and officers insurance policy. The Premium Agreement is for $305,759 at a fixed rate of 8.75% per annum, amortized over ten months. The Premium Agreement requires ten fixed monthly principal and interest payments of $31,815 from March 24, 2023 to December 24, 2023.

 

 

Note 10.         Sales of Shares Under Common Stock Purchase Agreement

 

On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement” or "ELOC") and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, but not the obligation, to sell to B. Riley up to $15,000,000 of shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), from time to time. Sales of Common Stock to B. Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B. Riley under the Purchase Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of 1933, as amended (the “Securities Act”) the resale by B. Riley of up to 450,000 shares of Common Stock that the Company may issue or elect, in the Company’s sole discretion, to issue and sell to B. Riley, from time to time under the Purchase Agreement.

 

On August 11, 2022 and November 10, 2022, the Company issued to B. Riley 8,984 and 2,995 shares, respectively, as a commitment fee in accordance with the Purchase Agreement. The total value of the commitment fee shares was $150,000 and is included in prepaid expenses and other current assets on the unaudited consolidated condensed balance sheet as of December 31, 2022. The commitment fee represents prepaid stock issuance cost and is being amortized to additional paid in capital as shares are sold under the Purchase Agreement. For the three and nine months ended September 30, 2023, the Company amortized $54,692 and $150,000 of the commitment fee, respectively.

 

During the three months ended September 30, 2023, the Company sold 20,000 shares of common stock under the ELOC at an average price of $5.90 per share, net of fees of $0.30 per share. The net proceeds from this sale were $118,655. During the nine months ended September 30, 2023, the Company sold 27,429 shares of common stock under the ELOC at an average price of $6.30 per share, net of fees of approximately $0.30 per share. The net proceeds from these sales were $172,108. There were no sales under the Purchase Agreement during the three and nine months ended September 30, 2022.

 

 

Note 11.         Income Taxes

 

For the three and nine months ended September 30, 2022, the Company’s effective tax rate was 0%. The difference between the statutory tax rate and the effective tax rate is primarily driven by the presence of a full valuation allowance against all deferred tax assets.

 

 

Note 12.         Earnings Per Share

 

Basic 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 23,104 shares from stock options and zero shares from warrants, and 29,456 shares from stock options and zero shares from warrants, were excluded from diluted shares for the three and nine months ended September 30, 2022, respectively. The antidilutive effects of 43,735 shares from stock options and zero shares from warrants, and 57,009 shares from stock options and 15,000 shares from warrants, were excluded from diluted shares for the three and nine months ended September 30, 2022, respectively.

 

 

WaveDancer, Inc. 

Form 10-Q September 30, 2023

 

 

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.