What changed in this filing

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Item 1. Financial Statements

2024-05-14 compared with 2023-11-13 · 224 added, 975 removed, 275 unchanged (81% of the section changed)

1 unchanged sentence

WAVEDANCER, INC.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2023

March 31, 2024

December 31, 2023

1 unchanged sentence

Cash and cash equivalents

$ 877,198  

$ 731,081  

$ 563,324 $ 681,995

Accounts receivable

1,479,780  

1,629,559  

776,025 1,117,862

Prepaid expenses and other current assets

363,668  

442,445  

220,594 267,351

Total current assets

2,720,646  

2,803,085  

1,559,943 2,067,208

Intangible assets, net of accumulated amortization of $ 528,522 and $ 484,461 , respectively

1,049,600  

1,181,783  

1,125,101  

961,478 1,005,539

1,125,101 1,125,101

Right-of-use operating lease asset

279,132  

376,104  

50,154 245,569

Property and equipment, net of accumulated depreciation and amortization of $ 440,991 and $ 432,620 , respectively

66,703  

98,991  

20,623  

79,305  

Assets held for sale

2,316,845  

$ 5,261,805  

$ 7,981,214  

49,628 57,999

18,419 18,419

$ 3,764,723 $ 4,519,835

LIABILITIES AND STOCKHOLDERS' EQUITY

1 unchanged sentence

Accounts payable

$ 495,895  

$ 573,789  

$ 662,318 $ 403,441

Revolving line of credit

500,000  

425,000  

Premium financing note payable

94,071  

500,000 500,000

Accrued payroll and related liabilities

604,079  

676,796  

541,777 615,766

Commissions payable

24,296  

125,033  

Income taxes payable

Other accrued liabilities

217,108  

283,497  

168,658 267,604

Contract liabilities

26,026  

182,756  

85,035 114,540

Operating lease liabilities - current

218,695  

203,342  

Deferred acquisition consideration

1,415,098  

78,778 163,282

Total current liabilities

2,183,271  

3,888,412  

2,040,016 2,098,306

Operating lease liabilities - non-current

134,790  

303,778  

Deferred tax liabilities, net

59,121  

16,187 16,187

Total liabilities

2,377,182  

4,251,311  

2,056,203 2,251,145

Stockholders' equity

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

2,148,291 and 2,083,860 shares issued, 1,980,986 and 1,916,555 shares outstanding as of September 30, 2023 and December 31, 2022, respectively

2,180,485 shares issued, 2,013,180 shares outstanding as of March 31, 2024 and December 31, 2023

Additional paid-in capital

36,303,586  

35,883,831  

Accumulated deficit

( 32,455,900 )  

36,570,737 36,456,957

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

( 965,211 )  

Total stockholders' equity

2,884,623  

3,729,903  

Total liabilities and stockholders' equity

$ 5,261,805  

$ 7,981,214  

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30,

Professional fees

$ 1,921,300  

$ 2,114,012  

Software sales

45,977  

192,367  

Total revenues

1,967,277  

2,306,379  

Cost of revenues

Cost of professional fees

1,268,820  

1,467,065  

Cost of software sales

48,645  

100,718  

Total cost of revenues excluding depreciation and amortization

1,317,465  

1,567,783  

649,812  

738,596  

Selling, general and administrative expenses

1,166,657  

1,868,714  

Operating income (loss) from continuing operations

( 516,845 )  

( 1,130,118 )

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

382,525  

Other income (expense), net

Interest expense

( 18,725 )  

Income (loss) from continuing operations before income taxes

( 149,932 )  

Accumulated deficit

( 33,899,186 ) ( 33,225,236 )

Provision for income taxes

23,000  

Net income (loss) from continuing operations

( 149,932 )  

Treasury stock, 167,305 shares at cost, as of March 31, 2024 and December 31, 2023

( 965,211 ) ( 965,211 )

Loss from discontinued operations

Total stockholders' equity

1,708,520 2,268,690

Net income (loss)

$ ( 149,932 )  

Total liabilities and stockholders' equity

$ 3,764,723 $ 4,519,835

Basic and diluted loss per share from continuing operations

$ ( 0.08 )  

Basic and diluted loss per share from discontinued operations

Basic and diluted net loss per share

$ ( 0.08 )  

Weighted average common shares outstanding

Basic and diluted

1,939,790  

1,838,213  

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

Form 10-Q March 31, 2024

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30,

Three Months Ended March 31,

Professional fees

$ 5,992,715  

$ 6,458,534  

Software sales

159,307  

2,593,877  

Total revenues

6,152,022  

9,052,411  

Cost of revenues

Cost of professional fees

3,979,059  

4,283,365  

Cost of software sales

161,340  

2,430,139  

Total cost of revenues excluding depreciation and amortization

4,140,399  

6,713,504  

2,011,623  

2,338,907  

Selling, general and administrative expenses

4,432,550  

6,745,357  

Gain on litigation settlement

( 1,442,468 )  

Operating loss from continuing operations

( 978,459 )  

( 4,406,450 )

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

382,525  

Gain on lease termination

Other income, net

Interest expense

( 90,982 )  

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

( 683,581 )  

( 4,462,047 )

Provision for income taxes

789,573  

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

( 683,581 )  

( 5,251,620 )

Equity in net loss of affiliate

( 245,525 )  

Net loss from continuing operations

( 929,106 )  

( 5,251,620 )

Income (loss) from discontinued operations

( 335,993 )  

( 3,052,648 )

$ ( 1,265,099 )  

$ ( 8,304,268 )

Loss from discontinued operations

Basic and diluted loss per share from continuing operations

$ ( 0.48 )  

Basic and diluted loss per share from discontinued operations

$ ( 0.17 )  

Basic and diluted net loss per share

$ ( 0.65 )  

Weighted average common shares outstanding

Basic and diluted

1,929,067  

1,768,853  

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

Form 10-Q March 31, 2024

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

$ ( 1,265,099 )  

$ ( 8,304,268 )

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

Loss from discontinued operations

335,993  

3,052,648  

Depreciation and amortization

164,471  

165,770  

Stock-based compensation

557,147  

1,187,552  

Deferred income tax expense

775,257  

Amortization of right-of-use assets

96,972  

136,441  

Accretion of deferred acquisition consideration

27,370  

59,467  

Gain on litigation settlement

( 1,442,468 )  

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

( 382,525 )  

Gain on lease termination

Equity in loss of affiliate

245,525  

Changes in operating assets and liabilities:

Accounts receivable

149,779  

132,688  

Prepaid expenses and other current assets

61,925  

84,842  

58,682  

Accounts payable

( 77,894 )  

Contract liabilities

( 156,730 )  

Accrued payroll and related liabilities and other accrued liabilities

( 139,106 )  

653,786  

Operating lease liability

( 153,635 )  

Commissions payable

( 100,737 )  

Cash used in operating activities of continuing operations

( 2,020,330 )  

( 2,769,479 )

Cash used in operating activities of discontinued operations

( 693,106 )  

( 2,330,754 )

Net cash used in operating activities

( 2,713,436 )  

( 5,100,233 )

Cash flows from investing activities

Acquisition of property and equipment

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

1,400,000  

Proceeds from disposal of business

935,974  

Net cash provided by (used in) investing activities

2,335,974  

Net cash provided by investing activities

Cash flows from financing activities

Borrowings under revolving line of credit

575,000  

Repayments under revolving line of credit

( 500,000 )  

Premium financing borrowings

305,759  

Premium financing repayments

( 211,688 )  

Proceeds from issuance of stock

347,108  

1,887,000  

Proceeds from exercise of stock options

37,642  

Net cash provided by financing activities

523,579  

1,924,642  

Net increase (decrease) in cash and cash equivalents

146,117  

( 3,409,651 )

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

731,081  

4,931,302  

Cash and cash equivalents, end of period

$ 877,198  

$ 1,521,651  

Supplemental cash flow Information

Interest paid

$ 18,356  

$ 1,002  

Non-cash investing and financing activities:

Non-cash proceeds on disposal of business

$ 1,263,000  

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

$ 112,500  

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

Form 10-Q March 31, 2024

WAVEDANCER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY

Balances at December 31, 2023

2,083,860  

$ 2,084  

$ 35,883,831  

$ ( 31,190,801 )  

$ ( 965,211 )  

$ 3,729,903  

( 1,349,952 )  

2,180,485 $ 2,180 $ 36,456,957 $ ( 33,225,236 ) $ ( 965,211 ) $ 2,268,690

- - - ( 673,950 ) - ( 673,950 )

Stock option compensation

353,658  

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

( 407,322 )  

56,259  

56,266  

Amortization of stock issue costs

( 18,635 )  

Issuance of stock from exercise of options

- - 113,780 - - 113,780

Balances at March 31, 2024

2,093,291  

35,875,189  

( 32,540,753 )  

( 965,211 )  

2,371,318  

234,785  

Stock option compensation

88,159  

Amortization of stock issue costs

( 76,673 )  

Balances at June 30, 2023

2,093,291  

35,886,675  

( 32,305,968 )  

( 965,211 )  

2,617,589  

( 149,932 )  

Stock option compensation

180,816  

55,000  

290,787  

290,842  

Amortization of stock issue costs

( 54,692 )  

Balances at September 30, 2023

2,148,291  

$ 2,148  

$ 36,303,586  

$ ( 32,455,900 )  

$ ( 965,211 )  

$ 2,884,623  

2,180,485 $ 2,180 $ 36,570,737 $ ( 33,899,186 ) $ ( 965,211 ) $ 1,708,520

Balances at December 31, 2022

1,888,231  

$ 1,888  

$ 31,806,458  

$ ( 13,436,963 )  

$ ( 930,211 )  

$ 17,441,172  

( 2,078,307 )  

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

Stock option compensation

312,176  

Issuance of stock from exercise of options

10,500  

26,788  

26,799  

Balances at March 31, 2022

1,898,731  

32,145,422  

( 15,515,270 )  

( 930,211 )  

15,701,840  

( 1,525,442 )  

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

Stock option compensation

529,565  

Issuance of stock from exercise of options

Balances at June 30, 2022

1,903,931  

32,683,374  

( 17,040,712 )  

( 930,211 )  

14,714,355  

( 4,700,519 )  

- - 353,658 - - 353,658

Stock option compensation

614,094  

166,300  

1,999,334  

1,999,500  

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

( 407,322 ) ( 407,322 )

7,429 7 37,624 37,631

Issuance of stock from exercise of options

10,700  

37,440  

( 35,000 )  

Balances at September 30, 2022

2,080,931  

$ 2,081  

$ 35,334,242  

$ ( 21,741,231 )  

$ ( 965,211 )  

$ 12,629,881  

2,000 2 7,398 - - 7,400

Balances at March 31, 2023

2,093,289 $ 2,093 $ 35,875,189 $ ( 32,540,753 ) $ ( 965,211 ) $ 2,371,318

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

Form 10-Q March 31, 2024

WAVEDANCER, INC.

2 unchanged sentences

Organization and Business

Founded in 1979 as Information Analysis Incorporated (“IAI”), IAI changed its name to WaveDancer, Inc.

(“WaveDancer”

or the “Company”) and converted from a Virginia corporation to a Delaware corporation in December 2021.

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

Founded in 1979 as Information Analysis Incorporated (“IAI”), IAI changed its name to WaveDancer, Inc.

(“WaveDancer” or the “Company”) and converted from a Virginia corporation to a Delaware corporation in December 2021.

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

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

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

Unless otherwise noted, all amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

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

Subsequent to the sale, the Company discontinued consolidating GMI and the Company has reflected GMI as a discontinued operation in its consolidated statements of operations through 2023.

Unless otherwise noted, all amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

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

Prior to March 17, 

2023, we had two operating segments:

Tellenger and Blockchain SCM. Given the classification of GMI, which comprised all of the material operations of the Blockchain SCM segment, as a discontinued operation (see Note 2 ).

On August 9, 2023 the Company sold its remaining equity interest in GMDC.

Prior to March 17, 2023, we had two operating segments:

Tellenger and Blockchain SCM.

Following the sale of GMI, which comprised all of the material operations of the Blockchain SCM segment, it was presented as a discontinued operation (see Note 2 ), and the Blockchain SCM segment ceased to exist.

After March 17, 2023, the Company manages its business as one reportable operating segment.

Liquidity and Going Concern

During the nine months ended September 30, 2023 , the Company generated an operating loss from continuing operations of $ 978,459 .

As of September 30, 2023 , the Company had working capital of $ 537,375 including cash and cash equivalents of $ 877,198 .

We estimate that over the twelve months from the date of these financial statements our operating activities may use as much as $ 1.0 million to $ 1.5 million of cash. 

On August 2, 2023, the Company realized $ 118,655 of cash proceeds from the sale of 

20,000 shares of common stock, and on August 9, 2023, the Company received $ 1,400,000 of cash from the sale of its remaining equity interest in GMDC and its contingent consideration receivable from GMDC. 

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

On September 29, 2023, the Company issued 35,000 shares of its common stock to its chairman and CEO for $ 175,000 of cash. The transaction was approved by the board of directors and was at a premium to the trading price on the date of the transaction.

We estimate that within twelve months from the issuance of these financial statements, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements as well as to grow its business either organically or through acquisitions.

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

There is no assurance that such activities will result in any transactions or provide additional capital.

Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying unaudited condensed consolidated financial statements are issued.

During the three months ended March 31, 2024 , the Company generated an operating loss from continuing operations of $ 673,971 .

As of March 31, 2024 , the Company had a net working capital deficit of $ 480,073 including cash and cash equivalents of $ 563,324 .

Under existing operating conditions, we estimate that over the twelve months from the date of these financial statements our operating activities may use as much as $ 1.0 million to $ 1.5 million of cash, including the satisfaction of all existing liabilities.

The Company's line of credit balance as of March 31, 2024 was $ 500,000 , has no additional borrowing capacity, and expires on May 16, 2024.

On November 15, 2023, the Company entered into a merger agreement with Firefly Neuroscience, Inc.

(“Firefly”), a privately held, commercial-stage, medical technology company, to combine the companies in an all-stock transaction (the "Merger").

The closing of the transaction requires the approval of WaveDancer and Firefly shareholders, both of which have been obtained, as well as the satisfaction of other closing conditions, as discussed more fully below in "Management's Discussion and Analysis of Financial Condition and Results of Operations".

The Merger agreement provides that in connection with the closing of the Merger, WaveDancer will sell its Tellenger subsidiary, the entity through which WaveDancer operates its current revenue-generating business, to WaveTop Solutions, Inc., a company owned and controlled by WaveDancer's chairman and chief executive officer.

Upon closing of the Merger, the combined company will focus on continuing to develop and commercialize Firefly’s Artificial Intelligence driven Brain Network Analytics (BNA™) platform, which was previously cleared by the U.S.

Food and Drug Administration.

The Merger is expected to close in late May or early June 2024.

The Company is seeking a short-term extension of its line of credit from the lender to allow for additional time to close the Merger transaction, upon which the lender will be repaid in full.

In the absence of an extension, the Company and FireFly are considering options to prevent or resolve the issues arising from a default.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business.

The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due.

The Company’s unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

WaveDancer, Inc.

Form 10 -Q March 31, 2024

Reverse Stock Split

On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $ 0.001 per share, (the “Common Stock”) at a ratio of one -for- ten (the “Reverse Stock Split”).

On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $ 0.001 per share, (the “Common Stock”) at a ratio of one -for- ten (the “Reverse Stock Split”).

The Reverse Stock split affected all issued common stock and options and warrants to acquire common stock.

1 unchanged sentence

All shares and per share amounts in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split.

Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834  pre-split shares to approximately 1,980,983 post-split shares, before finalizing the rounding of fractional shares.

As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten. 

Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834 pre-split shares to approximately 1,980,983 post-split shares, before finalizing the rounding of fractional shares.

As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten.

Certain amounts presented in the 2023 unaudited condensed consolidated financial statements, including common stock, additional paid-in capital, and shares and per share data have been retroactively adjusted for the reverse stock split to conform to the current period financial statement presentation.

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S.

generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10 -Q and Article 8 - 03 of Regulation S- X.

Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S.

generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10 -Q and Article 8 - 03 of Regulation S- X.

In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022 included in the Annual Report on Form 10 -K filed by the Company with the SEC on April 17, 2023 ( the “Annual Report”), as amended.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2023 included in the Annual Report on Form 10 -K filed by the Company with the SEC on March 20, 2024 ( the “Annual Report”), as amended.

The accompanying December 31, 2023 condensed consolidated balance sheet was derived from the audited financial statements included in the Annual Report but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The results of operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

WaveDancer, Inc.

Form 10 -Q September 30, 2023

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

or “our”).

The unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2024 include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we” or “our”).

All significant intercompany transactions and balances have been eliminated in consolidation.

Other than as discussed in “Equity Method Investments”

below, there have been no changes in the Company’s significant accounting policies as of September 30, 2023 , as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report.

There have been no changes in the Company’s significant accounting policies as of March 31, 2024 , as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report.

Equity Method Investments

The Company accounts for investments in which it owns between 20% to 50% of the common stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures (“ASC 323”

Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition.

The Company has accounted for investments in which it owns between 20% to 50% of the common stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures (“ASC 323” ).

The Company reflects its share of gains and losses from the investment in equity in net loss of affiliate in the unaudited condensed consolidated statements of operations using the most recently available earnings data at the end of the period.

In connection with the sale of GMI to GMDC on March 17, 2023, ( the "Sale Date"), the Company received common stock in GMDC representing approximately 24.9 % of the equity of GMDC.

In connection with the sale of GMI to GMDC on March 17, 2023, ( the "Sale Date"), the Company received common stock in GMDC representing approximately 24.9 % of the equity of GMDC.

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

The Company accounted for its investment in GMDC in accordance with the equity method from March 17, 2023 through August 9, 2023.

On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $ 400,000 in cash, and recognized a gain on sale of $ 64,525 .

As of September 30, 2023 the Company has no equity investment in GMDC and any other equity exposure to the GMI business.

On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $ 400,000 in cash and recognized a gain on sale of $ 64,525 .

As of March 31, 2024 the Company has no equity investment in GMDC nor any other equity exposure to the GMI business.

WaveDancer, Inc.

Form 10 -Q March 31, 2024

Use of Estimates

7 unchanged sentences

Concentration of Credit Risk

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

government agencies represented 

8.3 % of revenue and subcontracts under federal procurements represented 90.6 % of revenue.

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

Three subcontracts under federal procurements represented 29.3 %, 19.9 %, and 18.6 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 56.6 % of the Company’s revenue in aggregate.

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

government agencies represented 11.4 % of revenue and subcontracts under federal procurements represented 82.8 % of revenue.

During the three months ended March 31, 2024 , the Company’s prime contracts with U.S.

government agencies represented 8.9 %of revenue and subcontracts under federal procurements represented 91.1 % of revenue.

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

Three subcontracts under federal procurements represented 30.9 %, 

21.3 %, and 

13.0 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 49.9 % of the Company’s revenue in aggregate.

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

government agencies represented 

9.1 % of revenue and subcontracts under federal procurements represented 

89.3 % of revenue.

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

Three subcontracts under federal procurements represented 30.3 %, 21.1 %, and 

16.6 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 54.5 % of the Company’s revenue in aggregate.

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

government agencies represented 28.6 % of revenue and subcontracts under federal procurements represented 67.8 % of revenue.

Three subcontracts under federal procurements represented 29.0 %, 23.0 %, and 17.0 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 58.8 % of the Company’s revenue in aggregate.

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

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

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 September 30, 2023

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

As of September 30, 2023 , the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 42.2 % and 17.2 % of the Company’s outstanding accounts receivable, respectively.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 

69.8 % of the Company’s outstanding accounts receivable in aggregate.

As of September 30, 2022 , the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 46.5 % and 13.6 % of the Company’s outstanding accounts receivable, respectively.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 66.8 % of the Company’s outstanding accounts receivable in aggregate.

Three subcontracts under federal procurements represented 31.0 %, 24.0 %, and 13.9 % of revenue, respectively.

Revenue from one prime contractor under which the Company has multiple subcontracts represented 50.9 % of the Company’s revenue in aggregate.

As of March 31, 2024 , the Company’s accounts receivable included receivables from three subcontracts under federal procurements that represented 24.0 %, 20.7 %, and 14.0 % of the Company’s outstanding accounts receivable, respectively.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 51.6 % of the Company’s outstanding accounts receivable in aggregate.

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.

Receivables from one prime contractor under which the Company has multiple subcontracts represented 61.7 % of the Company’s outstanding accounts receivable in aggregate.

Sale and Deconsolidation of GMI and Discontinued Operations

On March 17, 2023, the Company entered in and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC, a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc.

In exchange for this sale, the Company received common shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred stock referenced below, 24.9 % interest in the purchaser, cash consideration of $ 935,974 and contingent annual payments equal to five percent ( 5 %) of the purchaser’s GAAP based revenue through December 31, 2029 attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies.

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

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

The equity interest StealthPoint and other GMDC investors received is in the form of Series A non-participating convertible preferred stock having a one -times ( 1x ) liquidation preference and no cumulative dividends.

In addition, the Company and GMDC entered into a transition services agreement whereby the Company continues to provide certain administrative services for GMI.

The value of these services is estimated to be $ 65,000 which was paid by GMDC at closing and is not subject to adjustment.

The $ 65,000 prepayment is included in other accrued liabilities on the unaudited condensed consolidated balance sheet as of March 31, 2023 and has been amortized as a reduction to selling, general and administrative expenses ratably over the three -month period ending June 30, 2023 after which time no further transition services were provided.

On March 17, 2023, the Company entered into and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC, a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc.

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

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

The equity interest StealthPoint and other GMDC investors received was in the form of Series A non-participating convertible preferred stock having a one -times ( 1x ) liquidation preference and no cumulative dividends.

In addition, the Company and GMDC entered into a transition services agreement whereby the Company continued to provide certain administrative services for GMI.

The value of these services were $ 65,000 which was paid by GMDC at closing and was not subject to adjustment.

WaveDancer, Inc.

Form 10 -Q March 31, 2024

The $ 65,000 prepayment was included in other accrued liabilities on the unaudited condensed consolidated balance sheet as of March 31, 2023 and was amortized as a reduction to selling, general and administrative expenses ratably over the three -month period ending June 30, 2023 after which time no further transition services were provided.

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

The Company also has the right to appoint a representative to GMDC’s board of directors and a right to co-invest in the anticipated Series B preferred stock financing round which GMDC intends to consummate in the future. The Company recognized a gain on the sale of GMI of $ 100,615 in the first quarter of 2023, which was included in net loss on discontinued operations in the unaudited condensed consolidated statement of operations, and immediately deconsolidated GMI upon its sale.

The Company also had the right to appoint a representative to GMDC’s board of directors and a right to co-invest in a later preferred stock financing round.

The Company recognized a gain on the sale of GMI of $ 100,615 in the first quarter of 2023, which was included in net loss on discontinued operations in the unaudited condensed consolidated statement of operations, and immediately deconsolidated GMI upon its sale.

GMDC was not a related party of the Company at the time of its purchase of GMI.

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

Subsequent to our deconsolidation of GMI, GMI and GMDC were related parties of the Company until the August 9, 2023 sale of our equity interest in GMDC.

The Company's current and future rights with regard to GMDC terminated with the sale of the equity interest.

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

2 unchanged sentences

Cash at closing

$ 935,974  

$ 935,974 Cash received at closing less estimated value of transition services to be provided.

Cash after closing

133,148  

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  

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  

682,000 Estimated by applying a discount rate of 40.8% to the projected cash receipts expected over the 7-year horizon.

1 unchanged sentence

Total consideration

$ 2,332,122  

The GMDC common stock was accounted for as an equity method investment from March 17, 2023 and through its sale on August 9, 2023.

During this period, a net loss of $ 245,525 in the equity investment was recorded. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $ 400,000 in cash, and recognized a gain on sale of $ 64,525 .

The contingent consideration receivable of $ 682,000 was settled in cash for $ 1,000,000 and a gain of $ 318,000 was recognized during the three months ended September 30, 2023 ( see Note 5 ).

WaveDancer, Inc.

Form 10 -Q September 30, 2023

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

March 17, 2023 ( See Note 1 ).

Three Months Ended September 30,

Nine Months Ended September 30,

$ 566,862  

The GMDC common stock was accounted for as an equity method investment from March 17, 2023 and through its sale on August 9, 2023.

During this period, a net loss of $ 245,525 in the equity investment was recorded.

On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $ 400,000 in cash and recognized a gain on sale of $ 64,525 .

The contingent consideration receivable of $ 682,000 was settled in cash for $ 1,000,000 and a gain of $ 318,000 was recognized (see Note 5 ).

The following table sets forth details of net earnings from discontinued operations for the three months ended March 31, 2024 and 2023 , which reflects the results of the Blockchain SCM operating segment through the date our controlling financial interest in it was sold – March 17, 2023 ( See Note 1 ).

Three Months Ended March 31,

Cost of revenue

256,974  

74,223  

1,118,301  

Excess of contract costs over revenue

( 256,974 )  

( 74,223 )  

Operating expenses -

Salaries and benefits

463,502  

484,249  

1,076,781  

Intangibles amortization

303,791  

85,338  

917,496  

Stock based compensation, before forfeitures

215,775  

65,487  

268,283  

Forfeiture of stock options

( 407,322 )  

- ( 407,322 )

Other operating expenses

113,078  

134,633  

702,534  

Change in fair value of contingent consideration

Goodwill impairment

2,254,624  

Gain on disposal of business

( 100,615 )  

- ( 100,615 )

Loss before income tax benefit

( 3,607,744 )  

( 335,993 )  

- ( 335,993 )

Income tax benefit

77,592  

1,788,509  

Net loss on discontinued operations

$ ( 3,530,152 )  

$ ( 335,993 )  

$ - $ ( 335,993 )

During the nine months ended September 30, 2023 , there was a total of 715,000 unvested stock options forfeited by GMI employees, including 527,500 forfeited by employees who resigned from WaveDancer, on the Sale Date, and were offered employment by GMDC.

WaveDancer, Inc.

Form 10 -Q March 31, 2024

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.

Stock-based compensation expense of $ 407,322 , previously recognized for these forfeited options, was taken back into income in March 2023.

The following table presents the components of the assets of our discontinued operations that were classified as held for sale as of December 31, 2022 .

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

Customer relationship intangible asset, net of amortization

$ 1,057,722  

Technology intangible asset, net of amortization

760,698  

Capitalized software development costs

498,425  

Total assets of discontinued operations

$ 2,316,845  

Revenue from Contracts with Customers

Nature of Products and Services

We generate revenue from the sales of information technology professional services, sales of third -party software licenses and implementation and training services, sales of third -party support and maintenance contracts based on those software products, and incentive payments received from third -party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company.

We generate revenue from the sales of information technology professional services, sales of third -party software licenses and implementation and training services, and sales of third -party support and maintenance contracts based on those software products.

We sell through our direct relationships with end customers and under subcontractor arrangements.

WaveDancer, Inc.

Form 10 -Q September 30, 2023

Professional services are offered through several arrangements –

through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts.

Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts.

Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed.

4 unchanged sentences

Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses.

The Company’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers.

Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented.

If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed.

Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal.

Revenue for bulk desktop software licenses for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal.

If the transaction prices of the performance obligations related to implementation and customer support for the individual contract are material, these obligations are recognized separately over time, as performed.

For desktop software licenses sold on an individual license basis to non-government customers, where the Company has no obligation to the customer after the third -party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs.

Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer.

Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.

Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer.

Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.

Disaggregation of Revenue from Contracts with Customers

Three Months Ended September 30,

Contract Type

Services time & materials

$ 1,714,509  

87.2 %  

$ 1,896,829  

Services fixed price over time

102,402  

58,965  

Services combination

33,090  

50,440  

Services fixed price per unit

71,299  

107,778  

Third-party software

45,977  

59,076  

Software support & maintenance

44,804  

Incentive payments

88,487  

Total revenue

$ 1,967,277  

100.0 %  

$ 2,306,379  

WaveDancer, Inc.

Form 10 -Q September 30, 2023

Nine Months Ended September 30,

Form 10 -Q March 31, 2024

Disaggregation of Revenue from Contracts with Customers

Three Months Ended March 31,

Contract Type

Services time & materials

$ 5,314,845  

86.4 %  

$ 5,963,361  

$ 1,654,001 86.4 % $ 1,880,662 87.1 %

Services fixed price over time

307,206  

161,273  

107,475 5.6 % 102,402 4.7 %

Services combination

99,270  

80,520  

31,920 1.7 % 33,090 1.5 %

Services fixed price per unit

271,394  

253,379  

92,471 4.8 % 87,304 4.1 %

Third-party software

159,307  

2,345,884  

Software support & maintenance

142,891  

Incentive payments

105,103  

29,505 1.5 % 56,665 2.6 %

Total revenue

$ 6,152,022  

100.0 %  

$ 9,052,411  

$ 1,915,372 100.0 % $ 2,160,123 100.0 %

Contract Balances

1 unchanged sentence

Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts.

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts.

Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate.

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

There were no such allowances recognized as of 

September 30, 2023 and December 31, 2022 .

Accounts receivable as of 

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

September 30, 2023

Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified.

There were no such allowances recognized as of March 31, 2024 and December 31, 2023 .

Accounts receivable as of March 31, 2024 and December 31, 2023 , consist of the following:

March 31, 2024

December 31, 2023

Billed federal government

$ 1,456,519  

$ 1,573,407  

$ 774,764 $ 1,110,001

Billed commercial and local government

22,000  

56,152  

Unbilled receivables

Accounts receivable

$ 1,479,780  

$ 1,629,559  

$ 776,025 $ 1,117,862

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

1 unchanged sentence

Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred.

Changes in contracts liabilities balances are as follows:

Changes in contract liabilities balances are as follows:

Balance at December 31, 2023

$ 182,756  

Contract liabilities added

1 unchanged sentence

Balance at March 31, 2024

127,091  

Contract liabilities added

Revenue recognized

Balance at June 30, 2023

72,003  

Contract liabilities added

Revenue recognized

Balance at September 30, 2023

$ 26,026  

Balance at December 31, 2022

$ 186,835  

Contract liabilities added

19,280  

Revenue recognized

Balance at March 31, 2023

149,692  

Contract liabilities added

87,612  

Revenue recognized

Balance as of June 30, 2022

165,843  

Contract liabilities added

Revenue recognized

Balance at September 30, 2022

$ 37,686  

Revenues recognized during the three months ended September 30, 2023 and 2022 , from the balances as of 

December 31, 2022 and 2021 , were $ 45,977  and $ 48,708 , respectively.

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

Revenues recognized during the three months ended March 31, 2024 and 2023 , from the balances as of December 31, 2023 and 2022 , were $ 55,531 and $ 55,665 , respectively.

WaveDancer, Inc.

Form 10 -Q September 30, 2023

Form 10 -Q March 31, 2024

Deferred Costs of Revenue

Deferred costs of revenue consist of the costs of third -party support and maintenance contracts for enterprise server-based software.

These costs are reported under the prepaid expenses and other current assets caption on the Company’s condensed consolidated balance sheets.

The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue.

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

Changes in deferred costs of revenue balances for the 

nine months ended September 30, 2022, are as follows:

As of December 31, 2022 and March 31, 2023 the Company had no deferred costs of revenue.

Changes in deferred costs of revenue balances for the three months ended March 31, 2024 are as follows:

Balance at December 31, 2023

$ 154,218  

Deferred costs added

Deferred costs expensed

Balance at March 31, 2024

101,656  

Deferred costs expensed

Balance as of June 30, 2022

48,222  

Deferred costs expensed

Balance as of September 30, 2022

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

The leases both commenced in 2021 and have original lease terms ranging from 37 to 67 months and rental rates escalate by approximately 2.5 % annually under both leases.

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

The leases both commenced in 2021 and had original lease terms ranging from 37 to 67 months, and rental rates escalate by approximately 2.5 % annually under both leases.

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

September 30, 2023 and December 31, 2022 , the Company does not have any sales-type or direct financing leases.

Each of the Company’s operating lease assets represent its right to use an underlying asset for the lease term and the related lease liability represent its obligation to make lease payments arising from the lease.

Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.

Since the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement dates in determining the present value of lease payments.

In February 2024, the Company gave notice of exercise of a termination option of the Fairfax Lease effective November 30, 2024 for a fee equivalent to two months rent, in accordance with lease terms.

Under lease modification standards, the Company reassessed the Fairfax Lease, resulting in the derecognition of the related lease asset of $ 165,721 and lease liabilities of $ 172,140 on the Company's condensed consolidated balance sheets and a gain on lease termination of $ 6,419 as presented on the Company's condensed consolidated statements of operations.

As of March 31, 2024 and December 31, 2023 , 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 represents its obligation to make lease payments arising from the lease.

Operating lease assets and liabilities are recognized at the commencement date, subject to reassessment upon the material modification of a lease, based on the present value of lease payments over the lease term.

Since the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement dates or lease modification dates in determining the present value of lease payments.

The operating lease assets also include any lease payments made and exclude lease incentives.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company’s lease agreements include rental payments escalating annually for inflation at a fixed rate.

These payments are included in the initial measurement of the operating lease liabilities and operating lease assets.

The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.

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

As of September 30, 2023 , our two operating leases had a weighted average remaining lease term of 28 months and a weighted average discount rate of 5.1 %.

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

58,041  

174,721  

74,804  

70,220  

As of March 31, 2024 , our remaining operating lease had a weighted average remaining lease term of 7 months and a weighted average discount rate of 4.5 %.

Future lease payments under operating leases as of March 31, 2024 , were as follows:

Remainder of 2024

Total lease payments

377,786  

Present value of lease liabilities

$ 353,485  

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

The total expense incurred related to its operating leases was $ 38,719 and $ 38,053 for the three months ended March 31, 2024 and 2023 , respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

WaveDancer, Inc.

Form 10 -Q September 30, 2023

Form 10 -Q March 31, 2024

Fair Value Measurements

2 unchanged sentences

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1—Quoted prices in active markets for identical assets or liabilities;

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of 

September 30, 2023 and December 31, 2022 :

September 30, 2023

Level 1—Quoted prices in active markets for identical assets or liabilities;

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 :

March 31, 2024

Cash equivalents:

Money market funds

$ 809,997  

$ 330,593 $ - $ - $ 330,593

December 31, 2023

1 unchanged sentence

Money market funds

$ 58,242  

As discussed in Note 2 above, in connection with its sale of GMI, the Company received contingent consideration that requires to GMDC to make annual payments equal to five percent ( 5 %) of the purchaser’s GAAP based revenue through December 31, 2029, up to a cumulative maximum of $ 4,000,000 , attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies.

The fair value of the contingent consideration was estimated based on GMDC’s forecast of revenue, the estimated after-tax payments to the Company, and the present value of the after-tax payments based on discount rate that reflects the risk of achieving the timing and amounts of forecasted payments.

The significant inputs utilized in estimating the fair value of contingent consideration include the forecast of revenues, the income tax rate of 27.0 percent, and the discount rate of 40.75 percent. On August 9, 2023, the Company and GMDC agreed to terminate all rights and obligations with respect to the calculation and payment of future contingent payments from GMDC to the Company in exchange for the payment of $ 1,000,000 cash by GMDC to the Company, resulting in a gain of $ 318,000 .

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

Fair value of contingent consideration:

December 31, 2022

682,000  

March 31, 2023

682,000  

June 30, 2023

682,000  

September 30, 2023

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

$ 631,258 $ - $ - $ 631,258

Money market funds are highly liquid investments and are included in cash and cash equivalents on the consolidated balance sheets.

The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date.

This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

As discussed in Note 2 above, in connection with its sale of GMI, the Company received contingent consideration that required 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 significant inputs utilized in estimating the fair value of contingent consideration include the forecast of revenues, the income tax rate of 27.0 percent, and the discount rate of 40.75 percent.

On August 9, 2023, the Company and GMDC agreed to terminate all rights and obligations with respect to the calculation and payment of future contingent payments from GMDC to the Company in exchange for the payment of $ 1,000,000 cash by GMDC to the Company, resulting in a gain of $ 318,000 .

There were no assets requiring Level 3 fair value measurements as of March 31, 2024 and December 31, 2023 .

There were no unrealized gains or losses recognized in income for the three -month periods ended March 31, 2024 and 2023 .

WaveDancer, Inc.

Form 10 -Q September 30, 2023

Intangible Assets and Goodwill

Form 10 -Q March 31, 2024

Intangible Assets

Information regarding our intangible assets is as follows:

1 unchanged sentence

Balance December 31, 2023

Balance September 30, 2023

Balance March 31, 2024

Intangible assets with estimated useful lives

Customer relationships

$ 1,090,000  

Non-compete agreements

120,000  

Accumulated amortization

( 308,217 )  

( 132,183 )  

901,783  

( 132,183 )  

769,600  

Intangible assets with indefinite lives

280,000  

Net identifiable intangible assets

$ 1,181,783  

$ ( 132,183 )  

$ 1,049,600  

Weighted Average Useful Life (Years)

Balance December 31, 2022

Balance September 30, 2022

Balance March 31, 2023

Intangible assets with estimated useful lives

Customer relationships

$ 1,090,000  

Non-compete agreements

120,000  

Accumulated amortization

( 131,973 )  

( 132,183 )  

1,078,027  

( 132,183 )  

945,844  

Intangible assets with indefinite lives

280,000  

Net identifiable intangible assets

$ 1,358,027  

$ ( 132,183 )  

$ 1,225,844  

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

$ 44,061  

146,307  

136,248  

170,488  

$ 769,600  

As of March 31, 2024 , expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows:

Remainder of 2024

WaveDancer, Inc.

Form 10 -Q March 31, 2024

Stock-Based Compensation

We have three stock-based compensation plans.

The 2006 Stock Incentive Plan was adopted in 2006 ( “2006 Plan”) and had options granted under it through April 12, 2016.

The 2016 Stock Incentive Plan was adopted in 2016 ( “2016 Plan”) and had options granted under it through November 15, 2021.

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

WaveDancer, Inc.

Form 10 -Q September 30, 2023

The 2006 Stock Incentive Plan was adopted in 2006 ( “2006 Plan”) and had options granted under it through April 12, 2016.

The 2016 Stock Incentive Plan was adopted in 2016 ( “2016 Plan”) and had options granted under it through November 15, 2021.

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

The Company recognizes compensation costs on a straight-line basis over the service period of the awards.

There were no option awards granted in the three and nine months ended September 30, 2023 .

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

Three Months  

Nine Months  

Risk-free interest rate

2.85 % - 2.90 %  

1.91 % - 2.90 %  

Dividend yield

Expected term (years)

3.25 - 6.00  

Expected volatility

45.9 % - 48.1 %  

45.8 % - 48.5 %  

Determining the assumptions for the expected term and volatility requires management to exercise significant judgment.

The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules.

Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards.

Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility to that of several public company issuers that operate within its market segment.

The guideline companies’

volatility was increased by a size adjustment premium of 30 % to compensate for the difference in size between the guideline companies and the Company in its calculation.

There were 53,500 options with grant date fair values totaling $ 168,900 , and 131,200 options with grant date fair values totaling $ 1,639,870 , granted during the three and nine months ended September 30, 2022 , respectively.

There were zero and 10,700  options exercised during the three months ended September 30, 2023 and 2022 , respectively.

There were 2,000  and 26,400 options exercised during the nine months ended September 30, 2023 and 2022 , respectively. As of September 30, 2023 , there was $ 431,067  of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plans;

There were no option awards granted in the three months ended March 31, 2024 and 2023 .

There were zero and 2,000 options exercised during the three months ended March 31, 2024 and 2023 , respectively.

As of March 31, 2024 , there was $ 222,359 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 14 months.

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

Settlement of Litigation

On April 28, 2023, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”).

On January 25, 2023, Gerald, as the result of the termination of his employment, filed a lawsuit against the Company for one year’s severance of $ 150,000 and benefits to which he claimed he was entitled under his employment agreement with the Company.

He had also claimed an anticipatory breach of the payment of $ 1,500,000 of deferred consideration otherwise due him on December 10, 2023, under the Stock Purchase Agreement between him and the Company and an anticipatory breach to release from escrow 43,648  shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement.

The Company filed an answer denying Gerald’s claims.

In addition, the Company filed a counterclaim seeking damages from Gerald associated with the acquisition transaction and arising under the Stock Purchase Agreement.

The principal terms of the Settlement Agreement were:

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 43,648  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 in the second quarter of 2023.

Revolving Line of Credit and Notes Payable

On September 30, 2022, the Company entered a revolving line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $ 1,000,000 at a variable interest rate equal to the prime rate as published in The Wall Street Journal , with a minimum rate of 3.99 % and a maximum rate of 20.00 %, and subject to a borrowing base calculated using outstanding accounts receivable.

Total compensation expense related to these plans was $ 113,780 and $ 288,172 for the three months ended March 31, 2024 and 2023 , respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

Revolving Line of Credit

Borrowings under the line of credit are secured by the assets of the Company.

There were no borrowings and $ 500,000 of repayments during the three months ended September 30, 2023 , and there were $575,000 of borrowings and $ 500,000 of repayments during the nine months ended September 30, 2023 .

There were no borrowings and no repayments during the three months ended March 31, 2024 , and there was $ 575,000 of borrowings and no repayments during the three months ended March 31, 2023 .

This line of credit expired on August 16, 2023.

On September 11, 2023, the Company and Summit entered a new line of credit agreement with the same terms as the preceding agreement, except that the maximum availability under the new line was reduced from $ 1,000,000 to $ 500,000 .

As of September 30, 2023 , there was $ 500,000 outstanding and no borrowing availability under this line of credit.

The line of credit expires on January 16, 2024.

As of March 31, 2024 , there was $ 500,000 outstanding and no borrowing availability under this line of credit.

The line of credit expires on May 16, 2024.

The Company is seeking a short-term extension from the lender to allow for additional time to close the Merger transaction, upon which the lender will be repaid in full.

As of March 31, 2024, the fair value of debt outstanding on our revolving line of credit approximates its carrying value due to the short term nature of the facility.

WaveDancer, Inc.

Form 10 -Q September 30, 2023

Premium Financing Note Payable

The Company entered into a Premium Finance Agreement (“Premium Agreement”) on March 7, 2023, to purchase a one -year term directors and officers insurance policy.

The Premium Agreement is for $ 305,759 at a fixed rate of 8.75 % per annum, amortized over ten months.

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

Form 10 -Q March 31, 2024

Sales of Shares Under Common Stock Purchase Agreement

On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”

or "ELOC") and a Registration Rights Agreement (the “Registration Rights Agreement”) with B.

Riley Principal Capital II, LLC (“B.

Riley”).

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.

Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, but not the obligation, to sell to B.

Riley up to $15,000,000 of shares of the Company’s common stock, par value $ 0.001 per share (“Common Stock”), from time to time.

Riley up to $ 15,000,000 of shares of the Company’s common stock, par value $ 0.001 per share (“Common Stock”), from time to time.

Sales of Common Stock to B.

Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B.

Riley under the Purchase Agreement.

Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of 1933, as amended (the “Securities Act”) the resale by B.

Riley of up to 450,000 shares of Common Stock that the Company may issue or elect, in the Company’s sole discretion, to issue and sell to B.

Riley, from time to time under the Purchase Agreement.

On August 11, 2022 and November 10, 2022, the Company issued to B.

Riley 8,984  and 2,995 shares, respectively, as a commitment fee in accordance with the Purchase Agreement.

The total value of the commitment fee shares was $ 150,000 and is included in prepaid expenses and other current assets on the unaudited consolidated condensed balance sheet as of December 31, 2022 .

The commitment fee represents prepaid stock issuance cost and is being amortized to additional paid in capital as shares are sold under the Purchase Agreement.

For the 

three and nine months ended September 30, 2023 , the Company amortized $ 54,692 and $ 150,000 of the commitment fee, respectively.

During the three months ended September 30, 2023 , the Company sold 20,000 shares of common stock under the ELOC at an average price of $ 5.90 per share, net of fees of $ 0.30 per share.

Use of the ELOC is subject to restrictions based on the price and trading volume of our stock, which limits its availability to the Company as a significant source of capital.

During the three months ended March 31, 2024 , the Company had no sales of shares of common stock.

During the three months ended March 31, 2023 , the Company sold 7,429 shares of common stock under the ELOC at an average price of $ 7.20 per share, net of fees of approximately $ 0.40 per share.

The net proceeds from this sale were $ 53,453 .

During the nine months ended September 30, 2023 , the Company sold 27,429  shares of common stock under the ELOC at an average price of $ 6.30 per share, net of fees of approximately $ 0.30 per share.

The net proceeds from these sales were $ 172,108 .

There were no sales under the Purchase Agreement during the three and nine months ended September 30, 2022 .

For the three and nine months ended September 30, 2022 , the Company’s effective tax rate was 0 %.

The difference between the statutory tax rate and the effective tax rate is primarily driven by the presence of a full valuation allowance against all deferred tax assets.

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.

For the three months ended March 31, 2024 and 2023 , the Company’s effective tax rate was 0 %.

The difference between the statutory tax rate and the effective tax rate for the three months ended March 31, 2024 is primarily driven by the presence of a full valuation allowance against all deferred tax assets.

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.

Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss because the inclusion of such items would be antidilutive.

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

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

WaveDancer, Inc.

Form 10 -Q September 30, 2023

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

These risks include, among others, the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

“will,”

“should,”

“could,”

“would,”

“expect,”

“plans,”

“anticipates,”

“believes,”

“estimates,”

“projects,”

“predicts,”

“intends,”

“potential”

and similar expressions intended to identify forward-looking statements.

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

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

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

in Item 1A of our 2022 10-K.

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

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

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.

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

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

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

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

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

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

On August 9, 2023, the Company sold its remaining 24.9% interest in GMI to GMDC.

On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525.

As of September 30, 2023 the Company has no equity method investment in GMDC and any other equity exposure to the GMI business.

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

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

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

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

Small Business Administration, U.S.

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

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

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

We maintain a pool of skilled COBOL programmers.

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

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

Through our acquisition in April 2021 of Tellenger, Inc.

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

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

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

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

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

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

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

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

Through the acquisition of Tellenger, Inc.

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

To grow organically, we are focused on bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.

As discussed below under ‘Liquidity and Capital Resources’, the Company will need to raise additional capital to grow its business either organically or through acquisition.

We are actively pursuing strategic alternatives which include the potential merger or sale of the Company.

Any such transaction, if consummated, could fundamentally alter the Company’s business.

Results of Continuing Operations –

Three Months Ended September 30, 2023 and 2022

Total revenue was $1,967,277 for the three months ended September 30, 2023, compared with $2,306,379 in the prior year quarter, a decrease of $339,102, or 14.7%.

The decrease in revenue was driven by our de-emphasis of third-party software sales which accounted for just 2.3% of our sales in the third quarter of 2023 as compared to 8.3% in the prior year quarter.

Professional services revenue decreased by $192,712, or 9.1%, to $1,921,300 in the third quarter of 2023 from $2,114,012 in the third quarter of 2022.

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

Gross profit decreased by $88,784 or 12.0%, to $649,812 for the three months ended September 30, 2023 as compared to $738,596 in the prior year quarter.

The decrease in gross profit includes an increase from professional services of $5,533 and a decrease from third-party software sales of $94,317.

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

Selling, General and Administrative Expenses

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

Increase/ (Decrease)

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 loss from continuing operations was $516,845 in the third quarter of 2023 as compared to a loss of $1,130,118 in the corresponding quarter in 2022, an improvement of $613,273, or 54.3%.

The decrease in the operating loss from continuing operations is primarily the result of the decrease in SG&A expenses of $702,057, as shown above, partially offset by the decrease in gross profit of $88,784.

WaveDancer, Inc.

Form 10-Q September 30, 2023

Results of Discontinued Operations –

Three Months Ended September 30, 2023 and 2022

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

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

Cost of revenue

Operating expenses -

Salaries and benefits

Depreciation and amortization

Stock based compensation

Other operating expenses

Goodwill impairment

Loss before income tax benefit

Income tax benefit

Net income on discontinued operations

Results of Continuing Operations –

Nine Months Ended September 30, 2023 and 2022

Total revenue was $6,152,022 for the nine months ended September 30, 2023, compared with $9,052,411 in the corresponding prior year period, a decrease of $2,900,389, or 32.0%.

The decrease in revenue was driven primarily by our de-emphasis of third-party software sales which accounted for just 2.6% of our sales in the nine months ended September 30, 2023, as compared to 28.7% in the nine months ended September 30, 2022.

Professional services revenue decreased by $465,819 to $5,992,715 for the nine months ended September 30, 2023, from $6,458,534 in the corresponding nine months of 2022.

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

Gross profit decreased by $327,284 or 14.0%, to $2,011,623 for the nine months ended September 30, 2023, as compared to $2,338,907 in the prior year.

The decrease in gross profit includes a decrease from professional services of $161,513 and from third-party software sales of $165,771.

Professional services gross profit as a percent of revenue declined slightly from 33.7% to 33.6% due primary to changes in the mix of contracts generating revenue and the related billing rates.

WaveDancer, Inc.

Form 10-Q September 30, 2023

Selling, General and Administrative Expenses

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

Increase/ (Decrease)

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 $978,459 for nine months ended September 30, 2023 as compared to $4,406,450 for the comparable prior year period, a decrease in the loss of $3,427,991 or 77.8%.

The decrease in the operating loss from continuing operations is primarily the result of the gain on litigation settlement of $1,442,468 along with the decrease in SG&A expenses of $2,312,807, as shown above, partially offset by the decrease in gross profit of $327,284.

Results of Discontinued Operations –

 Nine Months Ended September 30, 2023 and 2022

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

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

Goodwill impairment

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 September 30, 2023

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

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

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

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

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

Equity Method Investment in GMDC

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

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

The Series A transaction was considered by the Company to be the most reliable indication of the fair value of total equity of GMDC. We utilized an option pricing model backsolve method (“OPM Backsolve”) to solve for the total equity value that results in a value of Series A equal to its issuance price, and to estimate the fair value of common shares.

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

A minority interest discount of 23.5% was also applied.

Liquidity and Capital Resources

On September 30, 2023, the Company had a net working capital of $537,375, including cash and cash equivalents of $877,198 and $500,000 outstanding under its line of credit with Summit bank.

For the nine months ended September 30, 2023, we generated a net loss from continuing operations of $929,106.

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

Accordingly, there is substantial doubt about our ability to continue as a going concern.

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

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

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

We estimate that within twelve months from the date of issuing these financial statements, the Company will need to raise additional capital to meet its ongoing operating cash flow requirements.

We used cash from continuing operations of $2,020,330 during the nine months ended September 30, 2023 and anticipate that over the twelve months from the date of these financial statements our operating activities may use as much as $1.0 million to $1.5 million.

On August 9, 2023, the Company received $1,400,000 of cash from GMDC from:

1) the sale of the common stock of GMDC held by the Company;

and, 2) in satisfaction of the contingent consideration receivable due from GMDC to the Company.

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

The line of credit expires on January 16, 2024.

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

WaveDancer, Inc.

Form 10-Q September 30, 2023

Controls and Procedures

Disclosure Controls and Procedures

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

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

Changes in Internal Controls over Financial Reporting

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

Inherent Limitations on Effectiveness of Controls

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

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

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

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

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

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

The antidilutive effects of 3,929 shares from stock options and zero shares from warrants, and 34,599 shares from stock options and zero shares from warrants, were excluded from diluted shares for the three months ended March 31, 2024 and 2023 , respectively.

WaveDancer, Inc.

Form 10-Q September 30, 2023

PART II 

OTHER INFORMATION

Legal Proceedings

There are no pending legal proceedings to which we are a party or to which any of our property is subject and, to the best of our knowledge, no such actions against us are contemplated or threatened.

“Item 1A.

Risk Factors”

of our annual report on Form 10-K for the year ended December 31, 2022, as amended, includes a discussion of our risk factors.

There have been no material changes from the risk factors described in our annual report on Form 10-K for the year ended December 31, 2022.

Form 10-Q March 31, 2024

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