What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-08-11 compared with 2023-05-22 · 484 added, 165 removed, 481 unchanged (57% of the section changed)

1 unchanged sentence

WaveDancer, Inc.

Form 10-Q March 31, 2023

Form 10-Q June 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023

June 30, 2023

December 31, 2022

61 unchanged sentences

1,415,098  

Total current liabilities

12 unchanged sentences

Common stock, $ 0.001 par value 100,000,000 shares authorized;

20,932,885 and 20,838,599 shares issued, 19,259,834 and 19,165,548 shares outstanding as of March 31, 2023 and December 31, 2022, respectively

20,932,885 and 20,838,599 shares issued, 19,259,834 and 19,165,548 shares outstanding as of June 30, 2023 and December 31, 2022, respectively

20,933  

6 unchanged sentences

( 31,190,801 )

Treasury stock, 1,673,051 shares at cost, as of March 31, 2023 and December 31, 2022

Treasury stock, 1,673,051 shares at cost, as of June 30, 2023 and December 31, 2022

( 965,211 )  

7 unchanged sentences

WaveDancer, Inc.

Form 10-Q March 31, 2023

Form 10-Q June 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31,

Three Months Ended June 30,

Professional fees

6 unchanged sentences

Selling, general and administrative expenses

Change in fair value of contingent consideration

Operating loss from continuing operations

Gain on settlement of litigation

Operating income (loss) from continuing operations

Other income (expense), net

Interest expense

Income (loss) from continuing operations before income taxes and equity in net loss of affiliate

Provision for income taxes

Net income (loss) from continuing operations before equity in net loss of affiliate

Equity in net loss of affiliate

Net income (loss) from continuing operations

Income from discontinued operations

Net income (loss)

Income (loss) per share from continuing operations

Income per share from discontinued operations

Income (loss) per share

Weighted average common shares outstanding

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

WaveDancer, Inc.

Form 10-Q June 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

6 Months Ended June 30,

Professional fees

Software sales

Total revenues

Cost of revenues

Cost of professional fees

Cost of software sales

Total cost of revenues excluding depreciation and amortization

Selling, general and administrative expenses

Gain on settlement of litigation

Operating loss from continuing operations

Other income, net

Interest expense

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

Provision for income taxes

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

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

Equity in net loss of affiliate

Net loss from continuing operations

(Loss) income from discontinued operations

Income (loss) from discontinued operations

Basic and diluted loss per share from continuing operations

Basic and diluted loss per share from discontinued operations

Income (loss) per share from discontinued operations

Basic and diluted loss per share

Weighted average common shares outstanding

Basic and diluted

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

WaveDancer, Inc.

Form 10-Q March 31, 2023

Form 10-Q June 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

6 Months Ended June 30,

Cash flows from operating activities

6 unchanged sentences

Accretion of deferred acquisition consideration

Equity in net loss of affiliate

Gain on litigation settlement

Equity in loss of affiliate

Changes in operating assets and liabilities:

20 unchanged sentences

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

6 unchanged sentences

WaveDancer, Inc.

Form 10-Q March 31, 2023

Form 10-Q June 30, 2023

WAVEDANCER, INC.

2 unchanged sentences

Stock option compensation

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

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

Issuance of stock from exercise of options

Balances at March 31, 2023

Stock option compensation

Amortization of stock issue costs

Balances at June 30, 2023

Balances at December 31, 2021

2 unchanged sentences

Balances at March 31, 2022

Stock option compensation

Issuance of stock from exercise of options

Balances at June 30, 2022

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

WaveDancer, Inc.

Form 10-Q March 31, 2023

Form 10-Q June 30, 2023

WAVEDANCER, INC.

15 unchanged sentences

Liquidity and Going Concern

During the three months ended March 31, 2023, the Company generated a loss from continuing operations of $ 1,013,959 .

As of March 31, 2023, the Company had working capital of only $ 97,217 , including cash and cash equivalents of $ 814,722 and excluding deferred acquisition consideration payable of $ 1,435,576 (See Note 12 ), and had an accumulated deficit of $ 32,540,753 .

We estimate that by the end of 2023 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.

During the six months ended June 30, 2023, the Company generated an operating loss from continuing operations of $ 461,614 .

As of June 30, 2023, the Company had a working capital deficit of $ 780,757 including cash and cash equivalents of $ 338,300 , and excluding $ 1,000,000 of borrowings outstanding under its line of credit facility with Summit Bank ("Summit").

We estimate that over the twelve months from the date of these financial statements our operating activities may use as much as approximately $ 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 

200,000 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.

(See Note 13 for further information about these transactions).

On August 9, 2023, the Company repaid $ 500,000 on the Summit line of credit and has no further borrowing capacity thereunder.

We estimate that by the second quarter of 2024 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.

12 unchanged sentences

WaveDancer, Inc.

Form 10 -Q March 31, 2023

The unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2023 include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we”

Form 10 -Q June 30, 2023

The unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2023 include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we”

or “our”).

1 unchanged sentence

Other than as discussed in “Equity Method Investments”

below, there have been no changes in the Company’s significant accounting policies as of March 31, 2023, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report.

below, there have been no changes in the Company’s significant accounting policies as of June 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

4 unchanged sentences

The Company accounts for its investment in GMDC in accordance with the equity method.

For the period from March 18 through March 31, 2023, the Company recognized $ 23,872 as its share of GMDC’s net loss. The Company expects to maintain its investment in GMDC until GMDC’s controlling shareholders determine it is in their best interest to monetize their investment, which we expect may be three to five years.

See Note 2 for further information about the sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation.

On August 9, 2023, the Company sold its remaining equity interest in GMDC (See Note 13 ).

Use of Estimates

7 unchanged sentences

Concentration of Credit Risk

During the three months ended March 31, 2023, the Company’s prime contracts with U.S.

government agencies represented 8.9 % of revenue, subcontracts under federal procurements represented 87.7 % of revenue, and 3.4% of revenue came from commercial contracts.

During the three months ended June 30, 2023, the Company’s prime contracts with U.S.

government agencies represented 10.2 % of revenue and subcontracts under federal procurements represented 89.7 % of revenue.

The terms of these contracts and subcontracts vary from single transactions to five years.

1 unchanged sentence

Revenue from one prime contractor under which the Company has multiple subcontracts represented 55.1 % of the Company’s revenue in aggregate.

During the three months ended March 31, 2022, the Company’s prime contracts with U.S.

During the three months ended June 30, 2022, the Company’s prime contracts with U.S.

government agencies represented 34.7 % of revenue and subcontracts under federal procurements represented 60.7 % of revenue.

The terms of these contracts and subcontracts vary from single transactions to five years.

One prime contract represented 27.9 % of revenue, and three subcontracts under federal procurements represented 26.9 %, 16.0 %, and 11.0 % of revenue, respectively.

Two subcontracts under federal procurements represented 25.7 % and 14.47 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 37.1 % of the Company’s revenue in aggregate.

The Company sold third -party software and maintenance contracts under agreements with one major supplier, accounting for 2.6 % and 30.5 % of total revenue during the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, the Company’s accounts receivable included receivables from three subcontracts under federal procurements that represented 41.0 %, 12.0 %, and 12.5 % of the Company’s outstanding accounts receivable, respectively.

During the six months ended June 30, 2023, the Company’s subcontracts under federal procurements represented 88.7 % of revenue.

The terms of these subcontracts vary from one to five years.

Three subcontracts under federal procurements represented 30.8 %, 21.7 %, and 15.6 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 52.9 % of the Company’s revenue in aggregate.

During the six months ended June 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.

WaveDancer, Inc.

Form 10 -Q June 30, 2023

The Company sold third -party software and maintenance contracts under agreements with one major supplier, accounting for 39.3 % and 35.4 % of total revenue during the three - and six -months ended June 30, 2022, respectively.

As of June 30, 2023, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 49.5 % and 20.7 % of the Company’s outstanding accounts receivable, respectively.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 74.4 % of the Company’s outstanding accounts receivable in aggregate.

As of March 31, 2022, the Company’s accounts receivable included receivables from three subcontracts under federal procurements that represented 48.2 %, 19.7 %, and 10.3 % of the Company’s outstanding accounts receivable, respectively.

As of June 30, 2022, the Company’s accounts receivable included receivables from two prime contracts under federal procurements that represented 29.8 % and 14.0 % of the Company’s outstanding accounts receivable, respectively and one subcontract under a federal procurement that represented 26.9 % of the Company’s outstanding accounts receivable.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 32.8 % of the Company’s outstanding accounts receivable in aggregate.

WaveDancer, Inc.

Form 10-Q March 31, 2023

Sale and Deconsolidation of GMI and Discontinued Operations

2 unchanged sentences

Payments will be calculated for each calendar year and are due by March 31 of the following year.

GMDC also agreed to pay the Company approximately $ 133,148 for certain of GMI’s operating expenses for the period beginning March 1, 2023 through March 17, 2023.

The receivable for this payment is included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet as of March 31, 2023.

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.

1 unchanged sentence

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 will be amortized as a reduction to selling, general and administrative expenses ratably over the three -month period ending June 30, 2023 after which time we anticipate that no further transition services will be provided.

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 we anticipate that no further transition services will be provided.

The total cash received at closing was $ 1,000,974 .

3 unchanged sentences

Description and Valuation Methodology

Cash at closing  

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

Cash after closing  

Cash at closing

$ 935,974  

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

GMDC common stock  

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 unchanged sentences

The contingent consideration receivable will be remeasured at fair value at the end of each reporting period with adjustments reported in the consolidated statement of operations until the receivable is settled.

WaveDancer, Inc.

Form 10 -Q June 30, 2023

The Company recognized a gain on the sale of GMI of $ 100,615 , which is included in net loss on discontinued operations in the unaudited condensed consolidated statement of operations, and immediately deconsolidated GMI upon its sale.

1 unchanged sentence

Subsequent to our deconsolidation of GMI, GMI and GMDC are related parties of the Company due to our equity interest in GMDC.

The following table sets forth details of net earnings from discontinued operations for the

three months ended

March 31, 2023 and

2022, which reflects the results of the Blockchain SCM operating segment (See Note

Costs of customer contract fulfillment

The following table sets forth details of net earnings from discontinued operations for the six months ended June 30, 2023 and 2022, which reflects the results of the Blockchain SCM operating segment (See Note 1 ).

Three Months Ended June 30,

Six Months Ended June 30,

$ 566,862  

Cost of revenue

540,921  

74,223  

861,327  

25,941  

( 74,223 )  

Operating expenses -

2 unchanged sentences

484,249  

613,278  

Intangibles amortization

1 unchanged sentence

85,338  

613,705  

Stock based compensation, before forfeitures

1 unchanged sentence

65,487  

Forfeitures of stock option  

252,839  

Forfeiture of stock options

( 407,322 )  

Other operating expenses

1 unchanged sentence

134,633  

389,126  

Change in fair value of contingent consideration

( 942,609 )  

Gain on sale of GMI

Gain on disposal of business

( 100,615 )  

1 unchanged sentence

( 124,887 )  

( 335,993 )  

( 1,233,413 )

1 unchanged sentence

521,338  

Net (loss) income on discontinued operations

1,710,917  

Net income (loss) on discontinued operations

$ 396,451  

During the three months ended March 31, 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.

$ ( 335,993 )  

$ 477,504  

During the six months ended June 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.

March 31, 2023, GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet.

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.

Customer relationship intangible asset, net of amortization

6 unchanged sentences

$ 2,316,845  

Revenue from Contracts with Customers

3 unchanged sentences

WaveDancer, Inc.

Form 10 -Q March 31, 2023

Form 10 -Q June 30, 2023

Professional services are offered through several arrangements –

17 unchanged sentences

Disaggregation of Revenue from Contracts with Customers

Three months ended March 31,

Three months ended June 30,

Contract Type

2 unchanged sentences

$ 2,153,537  

Services fixed price over time

102,402  

51,154  

Services combination

33,090  

21,080  

Services fixed price per unit

112,791  

52,061  

Third-party software

56,665  

1,423,770  

Software support & maintenance

48,918  

Total revenue

$ 2,024,622  

$ 3,750,520  

WaveDancer, Inc.

Form 10 -Q June 30, 2023

Six months ended June 30,

Contract Type

Services time & materials

$ 3,600,335  

$ 4,066,533  

Services fixed price over time

3 unchanged sentences

66,180  

30,080  

Services fixed price per unit

11 unchanged sentences

$ 6,746,032  

$ 2,995,512  

WaveDancer, Inc.

Form 10 -Q March 31, 2023

Contract Balances

4 unchanged sentences

Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified.

There were no such allowances recognized as of March 31, 2023 and December 31, 2022.

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

March 31, 2023

There were no such allowances recognized as of June 30, 2023 and December 31, 2022.

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

June 30, 2023

December 31, 2022

4 unchanged sentences

56,152  

Unbilled receivables

28,312  

Accounts receivable

4 unchanged sentences

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 in the three months ended March 31, 2023 and 2022, are as follows:

Changes in contracts liabilities balances in the three and six months ended June 30, 2023 and 2022, are as follows:

Balance as of December 31, 2022

$ 182,756  

Contract liabilities added  

Revenue recognized  

Balance as of March 31, 2023  

127,091  

Contract liabilities added

Revenue recognized

Balance as of March 31, 2023

Balance as of June 30, 2023

$ 72,003  

1 unchanged sentence

$ 186,835  

Contract liabilities added  

19,280  

Revenue recognized  

Balance as of March 31, 2022  

149,692  

Contract liabilities added

1 unchanged sentence

Revenue recognized

Balance as of March 31, 2022

Balance as of June 30, 2022

$ 165,843  

Revenues recognized during the three months ended March 31, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $ 55,665 and $ 48,708 , respectively.

Revenues recognized during the three months ended June 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $ 55,088 and $ 55,168 , respectively.

Revenues recognized during the six months ended June 30, 2023 and 2022, from the balances as of December 31, 2022 and 2021, were $ 110,753 and $ 111,591 , respectively.

WaveDancer, Inc.

Form 10 -Q June 30, 2023

Deferred Costs of Revenue

2 unchanged sentences

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 December 31, 2022 and March 31, 2023 the Company $ 0 of deferred costs of revenue.

Changes in deferred costs of revenue balances for the three months ended March 31, 2022, are as follows:

As of June 

30, 2023, and December 31, 2022 the Company had $ 0 of deferred costs of revenue.

Changes in deferred costs of revenue balances for the three and six months ended June 30, 2022, are as follows:

Balance as of December 31, 2021

4 unchanged sentences

101,656  

WaveDancer, Inc.

Form 10 -Q March 31, 2023

Deferred costs expensed

Balance as of June 30, 2022

$ 48,222  

The Company has two significant operating leases, one for its headquarters offices in Fairfax, Virginia and one for additional office space in Annapolis, Maryland.

1 unchanged sentence

The Company determines if an arrangement is a lease at inception.

As of March 31, 2023 and December 31, 2022, the Company does not have any sales-type or direct financing leases.

As of June 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.

8 unchanged sentences

The Company does not sublease any real estate to third parties.

As of March 31, 2023, our two operating leases had a weighted average remaining lease term of 32 months and a weighted average discount rate of 5.0 %.

Future lease payments under operating leases as of March 31, 2023, were as follows:

As of June 30, 2023, our two operating leases had a weighted average remaining lease term of 29 months and a weighted average discount rate of 5.0 %.

Future lease payments under operating leases as of June 30, 2023, were as follows:

Remainder of 2023

7 unchanged sentences

$ 405,763  

The total expense incurred related to its operating leases was $ 38,053 and $ 56,414 for the three months ended March 31, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

The total expense incurred related to its operating leases was $ 38,053 and $ 54,460 for the three months ended June 

30, 2023 and 2022, respectively, and $ 76,106 and $ 110,720 for the six months ended June 

30, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

WaveDancer, Inc.

Form 10 -Q June 30, 2023

Fair Value Measurements

5 unchanged sentences

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.

WaveDancer, Inc.

Form 10 -Q March 31, 2023

The following table presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:

March 31, 2023

The following table presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:

June 30, 2023

Cash equivalents:

2 unchanged sentences

$ 3,250  

Contingent consideration receivable  

682,000  

6 unchanged sentences

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 amount 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.

1 unchanged sentence

Fair value of contingent consideration:

December 31, 2022  

Additions during quarter  

December 31, 2022

682,000  

March 31, 2023  

682,000  

There were no unrealized gains or losses recognized in income for the three months ended March 31, 2023.

June 30, 2023

$ 682,000  

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

WaveDancer, Inc.

Form 10 -Q June 30, 2023

Intangible Assets and Goodwill

Information regarding our intangible assets is as follows:

March 31, 2023

December 31, 2022

June 30, 2023

Intangible assets with estimated useful lives

Customer relationships

1,090,000  

Non-compete agreements

120,000  

Accumulated amortization

( 308,217 )  

( 44,061 )  

901,783  

( 44,061 )  

857,722  

Intangible assets with indefinite lives

280,000  

Net identifiable intangible assets

$ 1,181,783  

$ ( 44,061 )  

$ 1,137,722  

March 31, 2022

December 31, 2021

June 30, 2022

Intangible assets with estimated useful lives

Customer relationships

1,090,000  

Non-compete agreements

120,000  

Accumulated amortization

( 131,973 )  

( 44,061 )  

1,078,027  

( 44,061 )  

1,033,966  

Intangible assets with indefinite lives

280,000  

Net identifiable intangible assets

$ 1,358,027  

$ ( 44,061 )  

$ 1,313,966  

As of March 31, 2023, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows:

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

Remainder of 2023

$ 132,183  

146,307  

136,248  

170,488  

$ 857,722  

Stock-Based Compensation

3 unchanged sentences

On October 11, 2021, the Board of Directors approved the 2021 Stock Incentive Plan ( “2021 Plan”) and on December 2, 2021, our shareholders approved the 2021 Plan.

WaveDancer, Inc.

Form 10 -Q March 31, 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 months ended March 31, 2023.

Fair values of option awards granted in the three months ended March 31, 2022, were estimated using the Black-Scholes option pricing model under the following assumptions:

There were no option awards granted in the three and six months ended June 30, 2023 nor in the three months ended June 30, 2022.

Fair values of option awards granted in the six months ended June 30, 2022, were estimated using the Black-Scholes option pricing model under the following assumptions:

WaveDancer, Inc.

Form 10 -Q June 30, 2023

Risk-free interest rate

1.91 % - 

2.41 %  

Dividend yield

Expected term (years)

5.75 - 6.00  

Expected volatility

6 unchanged sentences

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 912,000 options with grant date fair values totaling $ 2,074,670 granted during the three months ended March 31, 2022.

There were 20,000 and 105,000 options and no options exercised during the three months ended March 31, 2023, and 2022, respectively.

As of March 31, 2023, there was $ 846,860 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plans;

There were 912,000 options with grant date fair values totaling $ 2,074,670 granted during the six months ended June 

There were zero and 52,000 options exercised during the three months ended June 30, 2023, and 2022, respectively.

There were 20,000  and 157,000 options exercised during the six months ended June 30, 2023 

and 2022, respectively. 

As of June 30, 2023, there was $ 591,946 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 13 months.

Total compensation expense related to these plans was $ 288,172 and $ 229,966 for the three months ended March 31, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

Total compensation expense related to these plans was $ 88,159 and $ 358,936 for the three months ended June 

30, 2023 and 2022, respectively, and $ 376,331 and $ 588,902 for the six months ended June 

30, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

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 436,481 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:

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;

The Company removed restrictions from 436,481 shares of the Company’s common stock;

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

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 .

Revolving Line of Credit and Notes Payable

Summit Line of Credit

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.

As of March 31, 2023, there was $ 1,000,000 outstanding under this line of credit and there were borrowings of $ 575,000 and no repayments during the three months ended March 31, 2023.

As of March 31, 2023, there is no borrowing availability under this line of credit. The line of credit expired on May 16, 2023, and the Company is in discussions with Summit to further extend the line of credit.

As of June 

30, 2023, there was $ 1,000,000 outstanding under this line of credit.

There we no borrowings or repayments during the three months ended June 30, 2023, and there were $575,000 of borrowings and no repayments during the six months ended June 30, 2023.

As of June 

30, 2023, there is no borrowing availability under this line of credit.

On August 9, 2023 the Company repaid $ 500,000 on the line of credit.

(See Note 13.

) The line of credit expires on August 16, 2023.

WaveDancer, Inc.

Form 10 -Q June 30, 2023

Premium Financing Note Payable

2 unchanged sentences

The Premium Agreement requires ten fixed monthly principal and interest payments of $ 31,815 from March 24, 2023 to December 24, 2023.

Sales of Shares Under Common Stock Purchase Agreement

On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B.

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.

12 unchanged sentences

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.

During the three months ended March 31, 2023, the Company amortized $ 15,822 of the commitment fee.

During the three months ended March 31, 2023, the Company sold 74,286 shares of common stock to B.

For the three - and six -month periods ended June 

30, 2023, the Company amortized $ 76,673 and $ 92,495 of the commitment fee, respectively.

During the three months ended June 30, 2023, there were no shares of common stock sold under the Purchase Agreement.

During the six months ended June 30, 2023, the Company sold 74,286 shares of common stock to B.

Riley at an average price of $ 0.72 per share, net of fees of approximately $ 0.04 per share.

The net proceeds from these sales were $ 53,453 .

WaveDancer, Inc.

Form 10 -Q March 31, 2023

During the three -month periods ended March 31, 2023 and 2022, the Company’s effective tax rate was 0 %.

The primary factors contributing to the difference between the statutory tax rate and the effective tax rate for the quarter ended March 31, 2023, are primarily driven by the presence of a full valuation allowance in all taxing jurisdictions.

WaveDancer, Inc.

Form 10 -Q March 31, 2023

Loss Per Share

Basic 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.

There were no sales under the Purchase Agreement during the three and six months ended June 

For the three - and six -month periods ended June 

30, 2023 and 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 in all taxing jurisdictions.

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 effect of 345,987 shares from stock options were excluded from diluted shares for the three months ended March 31, 2023.

The antidilutive effect of 778,196 shares from stock options and 530,435 shares from warrants were excluded from diluted shares for the three months ended March 31, 2022.

The antidilutive effect of 195,100 shares from stock options were excluded from diluted shares for the six -month period ended June 

The antidilutive effect of 711,537 shares from stock options and 146,269 shares from warrants were excluded from diluted shares for the three months ended June 30, 2022, and the antidilutive effect of 713,035 shares from stock options and 239,779 shares from warrants were excluded from diluted shares for the six months ended June 30, 2022.

Subsequent Events

Settlement of Litigation

On April 28, 2023, WaveDancer, Inc.

(the “Company”) and Jeffrey Gerald, the individual from whom the Company purchased all the outstanding shares of Gray Matters, Inc.

(“GMI”), executed an agreement to settle pending litigation between them (the “Settlement 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 are:

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

The Company will release from escrow 436,481 shares of the Company’s common stock 90 days after the date of the Settlement Agreement;

The Company will pay Gerald $ 25,000 as reimbursement for legal costs;

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

As a result of the settlement, the Company estimates that in the second quarter of 2023 it will recognize a gain on extinguishment of debt, net of expenses, of $ 1,410,576 .

On August 2, 2023, the Company sold 200,000 shares of common stock under the ELOC at a price of $ 0.59 per share, net of fees of $ 0.03 per share.

The net proceeds from this sale were $ 118,655 .

On August 9, 2023, the Company and GMDC closed a rollover stock purchase agreement and an amendment agreement to the Stock Purchase agreement dated March 17, 2023, wherein the Company had sold effectively 75.1 % of the equity of GMI to GMDC (the "Agreement").

The rollover stock purchase agreement and the amendment agreement together provide for the following:

The termination of the rights and obligations under the Agreement 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;

The sale by the Company, to certain of GMDC's investors, of all of its common stock of GMDC, in exchange for cash of $400,000;

The termination of various ongoing rights and obligations of the Company and GMDC established in the Agreement and ancillary agreements entered into in connection with the Agreement.

As a result of this transaction, the Company will recognize a gain of approximately $ 382,525 .

As of August 9, 2023 the Company has no remaining investment or financial interest in GMDC or GMI.

WaveDancer, Inc.

Form 10 -Q March 31, 2023

Form 10 -Q June 30, 2023

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

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements regarding our business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.

Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements.

Investors should read and understand the risk factors detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“Annual Report”) and in other filings with the Securities and Exchange Commission.

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control.

This list highlights some of the risks which may affect future operating results.

These are the risks and uncertainties we believe are most important for you to consider.

Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.

If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer.

These risks include, among others, the following:

We have had operating losses in three of each of the last four years and may not achieve or maintain profitability in the future.

A portion of our revenue is expected to be generated by sales to government entities, which are subject to a number of challenges and risks.

We face intense competition and could lose market share to our competitors, which could adversely affect our business, financial condition, and results of operations.

We rely on our management team and other key employees and will need additional personnel to grow our business, and the loss of one or more key employees or our inability to hire, integrate, train and retain qualified personnel, including members for our board of directors, could harm our business.

We are dependent on a few key customer contracts for a significant portion of our future revenue, and a significant reduction in services to one or more of these contracts would reduce our future revenue and harm our anticipated operating results.

We are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations.

We depend on computing infrastructure operated by Microsoft and other third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations.

Failure to comply with governmental laws and regulations could harm our business.

We are subject to risks associated with our strategic investments, and impairments in the value of our investments could negatively impact our financial results.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members.

If we are not able to maintain and enhance our brand and our reputation as a provider of high-quality security solutions and services, our business and results of operations may be adversely affected.

In some cases, you can identify forward-looking statements by terms such as “may,”

“will,”

“should,”

“could,”

“would,”

“expect,”

“plans,”

“anticipates,”

“believes,”

“estimates,”

“projects,”

“predicts,”

“intends,”

“potential”

and similar expressions intended to identify forward-looking statements.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.

Given these uncertainties, you should not place undue reliance on these forward-looking statements.

We discuss many of these risks in greater detail under the heading “Risk Factors”

in Item 1A of our 2022 10-K.

Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report.

Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.

WaveDancer, Inc.

Form 10-Q June 30, 2023

Founded in 1979 as Information Analysis Incorporated, the Company changed its name to WaveDancer, Inc.

and converted from a Virginia corporation to a Delaware corporation in December 2021.

The Company is in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.

On March 17, 2023, the Company sold effectively 75.1% of the equity of its Gray Matters, Inc.

subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”).

The Company’s retained interest in GMI of 24.9% is accounted for as an equity method investment.

Subsequent to the sale the Company discontinued consolidating GMI and the Company has reflected GMI as a discontinued operation in its consolidated statements of operations for all periods presented.

Unless otherwise noted, all amounts and disclosures throughout this Item 2 relate to the Company’s continuing operations.

See Note 2 to the unaudited condensed consolidated financial statements for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation.

The Company is an IT provider primarily for the benefit of federal government agencies.

At present, we primarily apply our technology, services and experience to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, data analytics, and we are in the process of acquiring talent and expertise in developing cybersecurity and cloud services practices.

Our focus is on enterprise IT solutions primarily relating to system modernization, cloud-based solutions and cybersecurity protection.

Since the Company’s inception, we have performed software development and conversion projects for over 100 commercial and government customers including, but not limited to, the Department of Agriculture, Department of Defense, Department of Education, Department of Homeland Security, Department of the Treasury, U.S.

Small Business Administration, U.S.

Air Force, Department of Veterans Affairs, and General Dynamics Information Technology (formerly Computer Sciences Corporation, CSRA).

Modernization has been a core competency of the Company for over 20 years.

We have modernized over 100 million lines of COBOL code for over 35 governmental and commercial customers.

We maintain a pool of skilled COBOL programmers.

This provides us with a competitive advantage as the labor pool of such programmers is shrinking as aging software professionals retire.

Our business has also historically relied upon the reselling of applications, primarily for forms development.

Through our acquisition in April 2021 of Tellenger, Inc.

(“Tellenger”), which is now a wholly owned subsidiary of the Company, we acquired competencies in web-based solutions and cybersecurity.

Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics.

We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud.

We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized.

It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the growth in the cybersecurity market.

In December 2021, we announced the reorganization of our entire professional services practice into Tellenger, and as a result, our professional services are contained in a single entity.

Through Tellenger, we perform services such as business process re-engineering, cloud migrations, and Software-as-a-Service (“SaaS”) implementations on behalf of clients in the private and public sector with an aim to increase productivity, gain efficiencies, and achieve key performance indicators.

Tellenger is appraised at Capability Maturity Model Integration (CMMI) Level 3.

WaveDancer, Inc.

Form 10-Q June 30, 2023

Our strategy is to grow our business organically as well as through acquisitions.

Through the acquisition of Tellenger, Inc.

in 2021, we began to reposition our legacy professional services business by allocating resources away from third-party product reselling and toward professional services, which management viewed as higher margin.

To grow organically, we have hired and plan to continue to hire, business development personnel and intend to become more proactive in bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.

Results of Continuing Operations –

Three Months Ended June  

30, 2023 and 2022

Total revenue was $2,024,622 for the three months ended June 30, 2023, compared with $3,750,520 in the prior year quarter, a decrease of $1,725,898, or 46.0%.

The decrease in revenue was driven by our de-emphasis of third-party software sales which accounted for just 2.8% of our sales in the second quarter of 2023 as compared to 39.3% in the prior year quarter.

Professional services revenue decrease by 13.6% to $1,967,957 in the second quarter of 2023 from $2,277,832 in the second quarter of 2022.

The decline in professional services revenue is driven primarily by one software modernization project where we had fewer resources deployed in the second quarter of 2023 as compared to the comparable prior year quarter based on current project deliverables.

Gross profit decreased by $198,828 or 22.0%, to $705,013 for the three months ended June 30, 2023 as compared to $903,841 in the prior year quarter.

The decrease in gross profit includes a decrease from professional services of $149,008 and from third-party software sales of $49,820.

Professional services gross profit as a percent of revenue declined from 37.5% to 35.8% due to a change in the mix of contracts generating revenue and the related billing rates resulting as well as increases in our costs of labor that outpaced billing rate increases.

Selling, General and Administrative Expenses

The following table shows the major elements of SG&A expenses for the three months ended June 30, 2023 and 2022 and the changes between periods:

Salaries and benefits

Stock based compensation

Legal and professional fees

Depreciation & Amortization

Acquisition costs

Software, IT and office expenses

Governance and investor relations

Marketing and promotions

Operating Income from Continuing Operations

Our operating income from continuing operations was $493,116 in the second quarter of 2023 as compared to a loss of $1,599,270 in the corresponding quarter in 2022, an improvement of $2,092,386.

The increase in income from continuing operations is primarily the result of a gain on the settlement of litigation of $1,442,468 and the decrease in SG&A expenses of $848,746, as shown above, partially offset by the decrease in gross profit of $198,828.

WaveDancer, Inc.

Form 10-Q June 30, 2023

Results of Discontinued Operations –

Three Months Ended June  

30, 2023 and 2022

The sale of GMI to GMDC occurred on March 17, 2023, and as a result, there was no activity for GMI in the second quarter of 2023.

Following is the detail of discontinued operations for the second quarter of 2022:

Cost of revenue

Operating expenses -

Salaries and benefits

Depreciation and amortization

Stock based compensation

Other operating expenses

Change in fair value of contingent consideration

Gain on disposal of business

Loss before income tax benefit

Income tax benefit

Net income on discontinued operations

Results of Continuing Operations –

Six Months Ended June  

30, 2023 and 2022

Total revenue was $4,184,745 for the six months ended June 30, 2023, compared with $6,746,032 in the corresponding prior year period, a decrease of $2,561,287, or 38.0%.

The decrease in revenue was driven primarily by our de-emphasis of third-party software sales which accounted for just 2.7% of our sales in the six months ended June 30, 2023, as compared to 35.6% in the six months ended June 30, 2022.

Professional services revenue decreased by 6.3% to $4,071,415 for the six months ended June 30, 2023, from $4,344,522 in the corresponding six months of 2022.

The decline in professional services revenue arose in the second quarter and is driven primarily by one software modernization project where we had fewer resources deployed in the second quarter of 2023 as compared to the comparable prior year quarter based on current project deliverables.

Gross profit decreased by $238,500 or 14.9%, to $1,361,811 for the six months ended June 30, 2023, as compared to $1,600,311 in the prior year.

The decrease in gross profit includes a decrease from professional services of $167,048 and from third-party software sales of $71,452.

Professional services gross profit as a percent of revenue declined from 35.2% to 33.4% due to a change in the mix of contracts generating revenue and the related billing rates resulting as well as increases in our costs of labor that outpaced billing rate increases.

WaveDancer, Inc.

Form 10-Q June 30, 2023

Selling, General and Administrative Expenses

The following table shows the major elements of SG&A expenses for the six months ended June 30, 2023 and 2022 and the changes between periods:

Salaries and benefits

Stock based compensation

Legal and professional fees

Depreciation & Amortization

Acquisition costs

Software, IT and office expenses

Governance and investor relations

Marketing and promotions

Operating Loss from Continuing Operations

Our operating loss from continuing operations was $461,614 for the first half of 2023 as compared to $3,276,332 for the first half of 2022, a decrease in the loss of $2,814,718 or 85.9%.

The decrease in the loss from operations is primarily the result of the gain on litigation settlement of $1,442,468 along with the decrease in decrease in SG&A expenses of $1,610,750, as shown above, partially offset by the decrease in gross profit of $238,500.

Results of Discontinued Operations –

Six Months Ended June  

30, 2023 and 2022

The sale of GMI to GMDC occurred on March 17, 2023, and as a result we had approximately two fewer weeks of costs and expenses for GMI for the first quarter of 2023 as compared to the first quarter of 2022, and no activity for the second quarter of 2023 as compared to a full second quarter in 2022, as follows:

Operating expenses -

Salaries and benefits

Depreciation and amortization

Stock based compensation, before forfeitures

Forfeiture of stock options

Other operating expenses

Change in fair value of contingent consideration

Gain on disposal of business

Loss before income tax benefit

Income tax benefit

Net income (loss) on discontinued operations

Critical Accounting Estimates

Our accounting policies are described in Note 1 of our consolidated financial statements –

Organization and Summary of Significant Accounting Policies .

Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S.

The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

Actual results could differ significantly from our estimates.

To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

WaveDancer, Inc.

Form 10-Q June 30, 2023

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 except for two new fair value measures for the first quarter of 2023:

1) the determination of the fair value of the contingent consideration receivable from GMDC, as discussed in Notes 2 and 5 to the accompanying consolidated financial statements, and

2) the determination of the initial fair value of our equity method investment in GMDC as of March 17, 2023.

The determination of the fair value of the contingent consideration is a recurring fair value measure at the end of each reporting period and includes significant judgmental inputs not observable in the market.

Significant judgment was employed in determining the assumptions used in the determination of fair value as of March 31, 2023 and, accordingly, changes in assumptions could have a material impact on the increase or decrease in the fair value of contingent consideration recorded in any given period.

Equity Method Investment in GMDC

The Company received 993,768 common shares of GMDC representing 19.0 percent of the fully diluted capitalization.

Prior to closing the acquisition on March 17 and through March 31, 2023, GMDC raised $3,000,000 by issuing Series A preferred shares at $1.00 per share representing 57.2 percent of the fully diluted capitalization.

The Series A transaction was considered by the Company to be the most reliable indication of the fair value of total equity of GMDC. 

We utilized an option pricing model backsolve method (“OPM Backsolve”) to solve for the total equity value that results in a value of Series A equal to its issuance price, and to estimate the fair value of common shares.

The significant inputs utilized in the OPM Backsolve include an estimated time to exit of four years, an estimated volatility of 75.0 percent, and a risk-free rate of 4.29 percent.

A minority interest discount of 23.5% was also applied.

Liquidity and Capital Resources

On June 30, 2023, the Company had a net working capital deficit of $780,357, including cash and cash equivalents of $338,300 and $1,000,000 outstanding under its line of credit with Summit bank.

For the six months ended June 30, 2023, we have generated a net loss from continuing operations of $779,174.

As discussed below, our ability to generate sufficient cash flows to meet our obligations for the twelve months following the issuance of these financial statements is dependent upon factors which are sufficiently outside of management’s control as to cast substantial doubt about our ability to continue as a going concern.

The Company will need to raise additional capital to grow its business either organically or through acquisition.

The Company is also pursuing strategic alternatives which include the potential merger or sale of the Company.

There is no assurance that our efforts will result in any transactions or provide additional capital, which creates substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying financial statements are issued.

We estimate that by the first quarter of 2024, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements.

We used cash for continuing operations of $389,177 during the second quarter of 2023 and anticipate that over the twelve months from the date of these financial statements our operating activities may use as much as approximately $1.0 million to $1.5 million.

On August 9, 2023, the Company received $1,400,000 of cash from GMDC as proceeds from the sale of the common stock of GMDC held by the Company and in satisfaction of the contingent consideration receivable due from GMDC to the Company.

On August 9, 2023, the Company repaid $500,000 on the Summit line of credit and has no further borrowing capacity thereunder.

The line of credit expires on August 16, 2023, and the Company and Summit are finalizing an extension of the expiration date to December 31, 2023, by which time the the remaining balance of $500,000 is due.

The Company has no commitments for capital spending nor any plans for material capital expenditures.

WaveDancer, Inc.

Form 10-Q June 30, 2023

Controls and Procedures

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and people performing similar functions, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of June 30, 2023 (the “Evaluation Date”).

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Because of the inherent limitations in all control systems, no control system can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake.

Additionally, controls can be circumvented by the individual acts of a person, by collusion of two or more people or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Notwithstanding these limitations, we believe that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

WaveDancer, Inc.

Form 10-Q June 30, 2023

PART II 

OTHER INFORMATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements