Item 5. Market for Registrant’s Common Equity
Item 5.
Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock began trading on the NASDAQ Capital Market (“NASDAQ”) under the symbol “WAVD” on November 26, 2021. Prior to trading on NASDAQ, our common stock started trading on the OTCQB market on January 15, 2021 under the symbol “IAIC.” Prior thereto, our common stock traded on the OTC Pink Market and the OTC Bulletin Board.
 
Holders
 
As of  December 31, 2021, we had 217 holders of record of our Common Stock.
 
Dividends
 
We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends within the foreseeable future. Our management anticipates that all earnings, if any, will be retained for development of our business. Any future dividends will be subject to the discretion of the board of directors and will depend on, among other things, future earnings, our operating and financial condition, our capital requirements, and general business conditions.
 
Recent Sales of Unregistered Securities
 
There were no unregistered sales of equity securities during the twelve months ended December 31, 2021 that were not disclosed by the Company on a Current Report on Form 8-K.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
We did not repurchase any of our equity securities during 2021.
 
Item 6.
[Reserved]
 
36
 
 
Item 7.
Management ’ s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report. This discussion, particularly information with respect to our outlook, key trends and uncertainties, our plans and strategy for our business, and our performance and future success, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A, “ Risk Factors. ” 
 
Overview
 
WaveDancer, formerly known as Information Analysis Incorporated (“IAI”), is engaged in providing professional services to U.S. government agencies to modernize information technology services, in selling and supporting third-party software, primarily Adobe products, to U.S. government agencies, and, with our December, 2021 acquisition of Gray Matters, Inc. (“GMI” or “Gray Matters”), in providing a blockchain enabled supply chain management software solution. With the acquisition of GMI, we began implementing a strategy that will expand our offerings well beyond systems modernization services and sales of third-party software.
 
Recent Developments
 
2021 was a year of significant change for the Company. We began the year with a new President and CEO, Stan Reese, who enacted a strategy designed to expand our offerings and grow our more profitable services business. In April, we acquired Tellenger, Inc. in order to become more competitive in the government contracting business. The Tellenger acquisition has expanded our IT services capabilities, including in cybersecurity. We refer to the products and services offered by Tellenger and WaveDancer prior to the acquisition of GMI as “Legacy IAI”.
 
In August 2021, our Board of Directors appointed Jamie Benoit as Chairman and CEO and Mr. Reese resumed his duties as President of Legacy IAI. Where the acquisition of Tellenger was a natural and important step forward, the appointment of Mr. Benoit and subsequent adoption of a new strategy represented a sea change for our Company. This new strategy has been developed to meet the needs of government and commercial customers in a rapidly evolving threat landscape relating to devices and data. Three key elements of this changing landscape include:
 
 
1.
the evolution of cybersecurity practices toward the zero trust approach;
 
2.
the proliferation of Internet of Things (IoT) devices that are taking enterprise networks to the edge; and
 
3.
the promise of blockchain technology.
 
As of the date of this filing we are moving aggressively to combine our existing capabilities, along with others we intend to build through acquisitions or alliances. Leveraging blockchain, we intend to deploy our software solutions to provide corporate and government organizations with a new, secure, and transparent way to conduct business to meet cybersecurity risks. Our efforts are designed to reposition WaveDancer as a disruptive technology in government and private sectors.
 
Coinciding with the appointment of Mr. Benoit in August 2021, the Company raised $2.8 million by issuing shares of common stock in an unregistered private offering to provide the initial funding for our strategy. Investors in this offering comprised the entirety of the Board of Directors and members of senior management, demonstrating our confidence in the new direction.
 
37
 
 
During the period from August 2021 through the date of this filing, we focused on putting the building blocks of this transformative strategy in place. In December 2021 we raised $10 million by issuing shares of common stock in an unregistered private offering, using the proceeds for the acquisition of GMI and to provide further liquidity to execute our strategy. Below is a summary of the key objectives of this initial phase of our strategy and certain related actions and accomplishments:
 
Objectives
 
Actions and Accomplishments
●         Enhance the Company’s profile
●         Improve the liquidity of our common stock
 
●         Listed on NASDAQ
●         Changed our name to WaveDancer
●         Reorganize management structure to leverage Tellenger and establish foundation for growth
●         Add capability to our Board of Directors and our management team to support and execute our strategy
●         Improve the predictability, and flexibility in the Company’s legal affairs
 
●         Appointed James C. “Chip” DiPaula and Rear Admiral (Ret.) Paul Becker to our Board
●         Added new key executives including Chief Growth Officer, Chief Sales Officer and Chief Financial Officer.
●         Changed incorporation from Virginia to Delaware
●         Adoption of a new certificate of incorporation and bylaws
●         Increase our shareholder base and raise funds to support our strategy
●         Identify and pursue acquisition targets consistent with our strategy
 
●         Raised $10 million in an unregistered private offering of common shares to over 75 new investors
●         Acquired Gray Matters, Inc.
●         In March 2022, entered into a definitive agreement to acquire Knowmadics
 
Many of the actions above required spending in advance of generating revenue from new products and services and as discussed below have resulted in increases in Selling, general and administrative (“SG&A”) expenses without the increases in revenue and margin that we plan to generate as our strategy takes hold. In 2022 we will hire salespeople, marketers, and software engineers, develop and implement sales and marketing programs, and expand our compliance, governance and administrative infrastructure to support our growing business. These activities will result in continued growth in the SG&A expense line as we continue to move aggressively in implementing our strategy.
 
Key Factors Affecting Our Performance
 
We believe that our performance and future success depend on a number of factors that present significant opportunities for us, as discussed in Part I, Item 1, “Business,” but also pose risks and challenges, as discussed in Part I, Item 1A, “Risk Factors.”
 
Results of Operations
 
The following table sets forth, for the periods indicated, selected information from our Consolidated Statements of Operations and the notes to the consolidated financial statements, expressed as a percentage of revenue:
 
 
 
Year Ended 12/31,
 
 
 
2021
 
 
2020
 
Revenues
 
 
 
 
 
 
 
 
Professional fees
 
 
70.5
%
 
 
39.8
%
Software sales
 
 
29.5
%
 
 
60.2
%
Total revenues
 
 
100.0
%
 
 
100.0
%
Cost of revenues
 
 
 
 
 
 
 
 
Cost of professional fees
 
 
47.1
%
 
 
25.6
%
Cost of software sales
 
 
28.8
%
 
 
58.5
%
Total cost of revenues
 
 
75.9
%
 
 
84.1
%
Gross profit
 
 
24.1
%
 
 
15.9
%
Selling, general and administrative expenses
 
 
36.5
%
 
 
12.9
%
Acquisition costs
 
 
5.0
%
 
 
0.0
%
(Loss) income from operations
 
 
(17.5
)%
 
 
3.0
%
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
 
(0.2
)%
 
 
0.0
%
Other income (expenses), net
 
 
0.1
%
 
 
0.0
%
Gain on forgiveness of note payable
 
 
3.0
%
 
 
0.0
%
(Loss) income before provision for income taxes
 
 
(14.6
)%
 
 
3.0
%
Income tax benefit
 
 
7.1
%
 
 
0.0
%
Net (loss) income
 
 
(7.5
)%
 
 
3.0
%
 
38
 
 
Revenue
 
Revenue increased by 8.1%, or $1.1 million, from $13.9 million in 2020 to $15.0 million in 2021. This net increase includes a significant shift of the mix of our primary types of revenue with professional fees revenue increasing by 91%, or $5.1 million, while sales of third-party software declined by 47%, or $3.9 million. Almost half of the increase in professional fees revenue, or $2.4 million came from the Tellenger business we acquired in early April. Excluding Tellenger, which does not sell software, our professional fees revenue grew by $2.6 million, or 47%. The decline in third-party software sales reflects a shift in emphasis toward our higher margin professional services business and away from sales of third-party software which typically generate single digit gross profit rates.
 
Gross Profit
 
Gross profit increased by $1.4 million, or 63.6%, from $2.2 million in 2020 to $3.6 million in 2021, with gross profit percentage increasing from 15.9% to 24.1%. This 820 basis point increase in gross profit percentage corresponds to the significant shift in revenue mix highlighted above. For 2021, professional fees revenue comprised 70.5% of our revenue versus 39.8% in 2020, and the gross profit percentage of professional fees revenue was 33.1% and 35.5% in 2021 and 2020, respectively, while the gross profit percentage for sales of third-party software was 2.4% and 3% in 2021 and 2020, respectively.
 
Selling, General and Administrative Expenses
 
SG&A expenses increased significantly in 2021 as we began to implement the transformative strategy outlined in Item 1 and in Recent Developments above. SG&A expense for 2021 was $5.5 million versus $1.8 million in 2020, which is an approximate three-fold increase. The following table shows the major elements of SG&A expenses and the changes from 2020 to 2021:
 
 
 
2021
 
 
2020
 
 
Increase
 
Stock-based compensation
 
$
1,868,897
 
 
$
27,628
 
 
$
1,841,269
 
Salaries and benefits
 
 
1,743,164
 
 
 
1,009,340
 
 
 
733,824
 
Legal and professional fees
 
 
421,470
 
 
 
95,095
 
 
 
326,375
 
Governance and investor relations
 
 
304,739
 
 
 
23,153
 
 
 
281,586
 
Intangibles amortization
 
 
201,032
 
 
 
-
 
 
 
201,032
 
All other
 
 
948,682
 
 
 
642,269
 
 
 
306,413
 
 
 
$
5,487,984
 
 
$
1,797,485
 
 
$
3,690,499
 
 
As shown in the table above, nearly half of the increase in SG&A is a result of stock-based compensation expense. We issue options to our employees and members of our board of directors to attract, retain and incentivize the individuals who will be critical to our success as we execute our strategy. In 2021 we issued 2.0 million options as compared to 0.2 million options in 2020 and our stock price appreciated significantly year over year, with the average daily high and low share prices increasing from $0.40 in 2020 to $2.47 in 2021.
 
The increase in salaries and benefits is mainly driven by the addition of new positions as we build the team necessary to execute the strategy. Starting in September 2021, we added executive positions to lead sales and marketing, while adding a new CEO and CFO and having the former executives stay on in other critical roles.
 
39
 
 
Our legal and professional fees spending increased in connection with our corporate reorganization, including revising our bylaws and reincorporating in Delaware, adopting a new Stock Incentive Plan, organizing a special meeting of shareholders, and other matters. The increase in governance and investor relations costs include increases in director fees, costs associated with our listing on NASDAQ and increased usage of outside investor relations resources as our corporate activities grew in volume and complexity. Intangible amortization expense of $0.2 million in 2021 increased from $0 in 2020 and is from the Tellenger and Gray Matters acquisitions.
 
Acquisition Costs
 
In 2021 we incurred $0.8 million of acquisition related expenses versus none in 2020. These expenses are related to the completed acquisitions of Tellenger and Gray Matters as well as efforts in connection with signing a definitive agreement to acquire Knowmadics. We incurred fees for legal advice, financial due diligence, valuation services, audit and tax services and other costs directly related to our acquisition activities. Efforts related to our pending acquisition of Knowmadics have continued through the date of this filing.
 
Gain on Debt Forgiveness
 
On April 20, 2020 we were granted a Paycheck Protection Program ("PPP") loan in the amount of $450,000. During 2021 we applied for forgiveness of the full amount of the loan including interest and on October 13, 2021 our application for forgiveness was approved.
 
Income Taxes
 
For 2021 we have recorded a tax benefit $1.1 million. As a result of our acquisitions of Tellenger and Gray Matters, we have recorded deferred tax liabilities that arise because we have intangible assets that will be amortized for book purposes but not for tax purposes. The recording of these liabilities in 2021 has the effect of allowing us to recognize tax benefits that arose in prior years, primarily related to net operating loss carryforwards, that we were unable to recognize previously. See the Note 10 in the notes to the consolidated financial statements for details.
 
Net Loss
 
For 2021 we had a net loss of $1.1 million as compared to net income of $0.4 million in 2020. The loss is driven primarily by the SG&A increases associated with our broad strategic alignment as well as our acquisition related expenses, which together account for $4.4 million of additional costs, more than offsetting our $1.4 million increase in gross profit and $1.1 million income tax benefit.
 
Liquidity and Capital Resources
 
As of December 31, 2021, we had $4.9 million of cash and cash equivalents on hand consisting of bank deposits and money market funds, approximately $2.8 million of which was from the funds we raised in an unregistered private offering of common stock in connection with the Gray Matters acquisition. In August of 2021 we raised $2.8 million, primarily from directors and officers of the Company, which was available to fund the increases in SG&A discussed above as well as to pay off $1.0 million of long-term debt and borrowings under our line of credit. Our line of credit is for $1 million and is fully available. It expires in April 2022 and the Company intends to renew it and no assurance can be provided of the renewal. Our business is not fixed asset intensive, and we have no commitments for capital expenditures. We have two office leases with lease commitments totaling $0.2 million in 2022 and $0.5 million during the remainder of their terms which end in 2024 and 2026. In connection with the acquisition, we are required to pay the seller of Gray Matters (the "Seller") $1.5 million in December 2023. Also, the Seller is entitled to additional consideration of up to $4 million contingent on the performance of Gray Matters for the year ending December 31, 2022. Our balance sheet as of December 31, 2021 reflects an estimated $1 million for that contingent liability and the payment, if any, would be due after March 31, 2023.
 
40
 
 
To meet our liquidity commitments and continue to execute our strategy through the end of 2022 and beyond, assuming we consummate the acquisition of Knowmadics, which we believe is likely, we intend to use a combination of cash on hand, the ability of Legacy IAI, Gray Matters and Knowmadics to generate cash from operations, and approximately $7.0 million from the approximately $66.5 million we intend to raise in connection with the pending Knowmadics acquisition, of which no assurance can be provided. See "- Impact of Acquisitions and Transformation of Our Business" below for more information on the pending Knowmadics acquisition and the funds we intend to raise in connection therewith.
 
To meet our liquidity commitments and continue to execute our strategy through the end of 2022 and beyond, if we do not consummate the acquisition of Knowmadics, we intend to use a combination of cash on hand, cash generated from the operations of Legacy IAI and Gray Matters, and we will reduce our operating expense cost structure to align with this scenario which will provide additional operating cash flow.
 
Based on our current cash position and operating plan, we anticipate that we will be able to meet our cash requirements through the end of the second quarter of 2023.
 
We do not have any off-balance-sheet arrangements that have or are likely to have a material current or future effect on our financial condition, or changes in financial condition, liquidity or capital resources or expenditures.
 
Critical Accounting Estimates
 
Our significant accounting policies are described in Note 1 to our accompanying consolidated financial statements. We consider the accounting policies related to revenue recognition to be critical to the understanding of our results of operations. Our critical accounting policies also include the areas where we have made what we consider to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly impact our financial results under different assumptions and conditions. We prepare our financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.
 
Revenue Recognition
 
We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer. ASC 606 prescribes a five-step model for recognizing revenue that includes identifying the contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. Timing of the satisfaction of performance obligations varies based on whether we are selling a product or service and the contractual terms. Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period.  Our contracts may have a single performance obligation or multiple performance obligations. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on our best estimate of standalone selling price.
 
Stock-Based Compensation
 
The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense. Determining the inputs for the valuation model requires significant judgment, particularly related to the estimation of stock price volatility. Historically there has been a limited public market for the Company’s stock, and as a result the Company estimates its expected volatility by using the volatility of a pool of several public company issuers that operate within its market segment as a benchmark. The Company adjusts the results of the benchmark analysis to reflect differences in the size of the benchmark companies and their capital structures as compared to ours. The selection of comparable companies and the amount of the size adjustment require significant judgment and changes in those assumptions could have a material impact on our reported results of operation.
 
Business Combinations and Acquired Intangible Assets
 
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The purchase price allocation process requires management to make significant estimates of projected financial information and assumptions with respect to valuation of intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of highly subjective judgments used to estimate the fair value of intangibles assets include, but are not limited to, projections of future expected cash flows, expected customer attrition rates, estimated technology obsolescence rates, and discount rates.
 
These estimates were particularly subjective and uncertain as it relates to the acquired intangibles in the Gray Matters acquisition due to the relative novelty of blockchain supply chain software solutions, the fast pace of emerging competitive solutions and our limited experience managing and monetizing blockchain technology. We intend to closely monitor our financial performance in our blockchain SCM business relative to our initial acquisition projections and look for indicators of impairment if we experience challenges executing our strategy and monetizing the acquired software technology and other intangibles.
 
 
41
 
 
Impact of Acquisitions and Transformation of Our Business
 
We expect our revenue, the nature of our revenue, our expenses, and our income in 2022 and thereafter to materially change, especially if we acquire Knowmadics. We are phasing out our sales of third-party software products that, notwithstanding the revenue we earned from these sales, generated gross profit of less than 2% in both 2021 and 2020. In 2021 and 2020, we generated $4,441,226 and $8,375,932 of revenue from such software sales. We anticipate our professional service revenue, which had a gross profit in excess of 25% in 2021, will continue to increase because of our acquisition of Tellenger which resulted in an increase of such revenue in 2021. With our acquisition of Gray Matters, the Company expects to generate revenue from licensing its blockchain SCM software with favorable margins in 2022. Our intent is to adopt a Software as a Service ("SaaS") model and to materially grow the blockchain SCM business. Under the SaaS model, in general, customers would pay a subscription fee for the right to access cloud-based software and the Company would recognize revenue ratably over the subscription period.
 
If we close the Knowmadics acquisition, then we expect our revenue and gross profits to materially increase in the second half of 2022.
 
In anticipation of our change in strategy and the transformation of our business, we began to hire additional personnel in the latter part of 2021. Gray Matters and primarily Knowmadics, if we complete the acquisition, will require us to further increase our personnel resources in all facets of our business, such as in sales, marketing, engineering, and administration. We do not anticipate generating a profit in 2022 as a result of the added personnel costs we will be incurring.
 
In connection with the anticipated closing of our acquisition of Knowmadics in the second quarter of 2022, we plan to raise approximately $66.5 million by issuing additional common shares. The cash raised will be used for the cash consideration of approximately $56.5 million, to cover costs in connection with the fundraising and transaction expenses of approximately $3.0 million, and to provide approximately $7.0 million of additional liquidity for the Company to continue to implement its strategy.
 
Government Regulation
 
We are bound by various rules and regulations promulgated by the federal government and agencies thereunder. We have not experienced undue expense beyond those expenses normally incurred in our ordinary course of business in adhering to such rules and regulations. Since historically most of our business is derived from contracts either directly with the U.S. federal government or as a subcontractor on behalf of U.S. federal government customers, most of our contracts are subject to termination at the election of the government. 
 
Given our current strategy to reposition the business within the SCM sector, President Biden’s Executive Order on America’s Supply Chains, issued on February 24, 2021, may have a direct impact on our business going forward. The executive order launches a comprehensive review of U.S. supply chains and directs federal departments and agencies to identify ways to secure U.S. supply chains against a wide range of risks and vulnerabilities. Management believes the executive order could lead to potential legislative, policy or regulatory changes that could require companies to enhance their governance, risk management, and compliance efforts. Such changes could increase demand for certain visibility and security services with respect to SCM that the Company intends to offer.
 
42