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, 2021 ("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 occurs, our business, financial condition and
operating results would likely suffer. These risks include, among others, the
? Our business is subject to risks related to our pending acquisition of
Knowmadics, Inc. which is subject to shareholder approval as of the date of
? Our business is subject to risks related to our acquisition of Gray Matters,
? Recent, past and future acquisitions and investments could disrupt our
business and harm our financial condition and operating results.
? Our business is subject to risks related to the COVID-19 pandemic and the
conflict in Ukraine.
? Our operating history and recent and proposed changes to our business model
make it difficult to evaluate our current business and prospects and may
increase the risk that we will not be successful.
? We have had operating losses in three of each of the last four years and may
not achieve or maintain profitability in the future.
? If the cybersecurity, Internet of Things ("IoT"), enterprise resource planning
("ERP"), command and control ("C2"), or supply chain management ("SCM")
markets are not receptive to our solutions, our sales will not grow as quickly
as anticipated, or at all, and our business, results of operations and
financial condition would be harmed.
? 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
? 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
? Our business is subject to risks related to the use of blockchain and
distributed ledger technology.
? 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
? Our proprietary rights may be difficult to enforce or protect, which could
enable others to copy or use aspects of our products or subscriptions without
? Our use of open-source software in our products and subscriptions could
negatively affect our ability to sell our products and subscriptions and
subject us to possible litigation.
? 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 Amazon Web Services ("AWS"),
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
? We are subject to risks associated with our strategic investments, and
impairments in the value of our investments could negatively impact our
? 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
? 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 2021 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.
Founded in 1979 as Information Analysis Incorporated, the Company changed its
name to WaveDancer, Inc. and converted from a Virginia corporation to a Delaware
corporation in December 2021. The Company is in the business of developing and
maintaining information technology ("IT") systems, modernizing client
information systems, and performing other IT-related professional services to
government and commercial organizations.
The Company is an IT provider primarily for the benefit of federal government
agencies. At present, we primarily apply our technology, services and experience
to legacy software migration and modernization, developing web-based and mobile
device solutions, including dynamic electronic forms development and conversion,
data analytics, and we are in the process of acquiring talent and expertise in
developing cybersecurity and cloud services practices. Our focus is on
enterprise IT solutions primarily relating to system modernization, cloud-based
solutions and cybersecurity protection.
Since the Company's inception, we have performed software development and
conversion projects for over 100 commercial and government customers including,
but not limited to, the Department of Agriculture, Department of Defense,
Department of Education, Department of Homeland Security, Department of the
Treasury, U.S. Small Business Administration, U.S. Army, U.S. Air Force,
Department of Veterans Affairs, and General Dynamics Information Technology
(formerly Computer Sciences Corporation, CSRA).
Modernization has been a core competency of the Company for over 20 years. We
have modernized over 100 million lines of COBOL code for over 35 governmental
and commercial customers. We maintain a pool of skilled COBOL programmers. This
provides us with 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
Through our acquisition in April 2021 of Tellenger, Inc. ("Tellenger"), which is
now a wholly-owned subsidiary of the Company, we acquired competencies in
web-based solutions and cybersecurity. Tellenger is a boutique IT consulting and
software development firm specializing in modernization, software development,
cybersecurity, cloud solutions, and data analytics. We believe combining
web-based solutions with system modernization will provide us with the skill
sets that are needed to migrate legacy systems to the cloud. We foresee this as
a key component of our modernization growth since there are billions of lines of
code, in both the governmental and commercial sectors, that eventually must be
modernized. It is also our intention to better leverage our resources, largely
gained through the acquisition of Tellenger, to take advantage of the growth in
the cybersecurity market.
In December 2021, we announced the reorganization of our entire professional
services practice into Tellenger, and as a result, our professional services are
contained in a single entity. Through Tellenger, we perform services such as
business process re-engineering, cloud migrations, and Software-as-a-Service
("SaaS") implementations on behalf of clients in the private and public sector
with an aim to increase productivity, gain efficiencies, and achieve key
performance indicators. Tellenger is appraised at Capability Maturity Model
Integration (CMMI) Level 3.
Through our acquisition of Gray Matters, Inc. and in connection with our
business transformation strategy which we discuss below, in December 2021 we
gained access to blockchain and encryption algorithm technology. Gray Matters
specializes in the supply chain management ("SCM") industry and in United States
intelligence, national security and diplomatic organizations. Gray Matters uses
a "Zero Trust" product and is designed to secure and monitor the lifecycle of
manufacturing through destruction and recycling.
We refer to the products and services offered by Tellenger and WaveDancer prior
to the acquisition of GMI as "Legacy IAI".
Our strategy is to grow our business organically as well as through
Through the acquisitions of Tellenger and Gray Matters 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, including within the SCM sector. In
assessing the Company's repositioning, management observed cybersecurity
practices as evolving toward a zero-trust approach, the integration of
blockchain as enhancing SCM, and the proliferation of Internet of Things ("IoT")
devices that were taking organizational networks to the edge. With respect to
its focus on IoT, on March 18, 2022 the Company agreed to acquire Knowmadics,
Inc. ("Knowmadics"). The acquisition remains subject to stockholder approval of
share issuances contemplated under the definitive purchase agreement and our
obtaining financing to fund the purchase price under the agreement.
Additionally, we have been seeking to purchase other technology companies whose
businesses complement the Company's existing business and whose personnel would
better enable us to compete for engagements in our focus areas.
To grow organically, we have hired and plan to continue to hire, business
development personnel and intend to become more proactive in bidding as a prime
contractor on government proposals and in expanding our outreach to larger prime
contractors for subcontract and teaming opportunities.
Results of Operations
Three Months Ended March 31, 2022 versus Three Months Ended March 31, 2021
Total revenue was $2,995,512 for the three months ended March 31, 2022, compared
with $3,419,580 in the prior year quarter, a decrease of $424,068, or 12.4%. The
decrease consists of: 1) professional services decrease of $372,569 including a
decrease of $1,058,515 from Legacy IAI before the Tellenger acquisition,
partially offset by $685,949 of revenue generated by the contracts from the
Tellenger acquisition; and 2) third-party software sales decrease of $51,499.
The decline in revenue for Legacy IAI before the Tellenger acquisition has three
main drivers: 1) one contract for which the 2021 first quarter included
significant levels of overtime in connection with meeting an accelerated
milestone, while in the 2022 quarter we did not devote overtime resources to the
project ($556 thousand); 2) one contract that has transitioned to a maintenance
phase where in 2021 we had revenues associated with systems conversion ($329
thousand); and 3) one contract that ended in 2021 ($227 thousand).
Gross profit decreased by $643,585 or 63.1%, to $376,065, in the first quarter
of 2022 as compared to the first quarter of 2021. This year over year gross
profit decrease comprises the following elements: 1) core professional services
business of $269,132; 2) third-party software sales of approximately $26,700;
and 3) approximately $347,753 of costs for a contract for which we were unable
to recognize revenue during the quarter. The decrease related to our core
professional services business was driven primarily by the comparable 2021
period including significant levels of overtime in connection with meeting an
accelerated milestone while in the 2022 quarter we did not devote overtime
resources to the project. The reduction of gross profit from expiring or reduced
contracts in Legacy IAI before the Tellenger acquisition were mostly offset by
the addition of gross profits generated by the contracts from the Tellenger
acquisition. For the contract for which we did not recognize revenue in the
quarter, we anticipate that we will recognize revenue in both the second and
third quarters of 2022 that will be directly related to the costs incurred in
the first quarter this year.
Selling, General and Administrative Expenses
SG&A expenses have increased significantly since the second half of 2021 when we
began to implement the transformative strategy described in the Our Strategy
section above and in the Annual Report. The following table shows the major
elements of SG&A expenses for the three months ended March 31, 2022 and 2021 and
the increases between quarters:
2022 2021 Increase
Legal and professional fees $ 624,763 $ 78,981 $ 545,782
Personnel costs 969,388 460,851 508,537
Intangibles amortization 349,893 - 349,893
Stock-based compensation 312,176 27,711 284,465
Governance and investor relations 161,687 33,932 127,755
IT and office expenses 143,019 48,305 94,714
Marketing expenses 49,041 5,155 43,886
All other 104,375 25,315 79,060
$ 2,714,342 $ 680,250 $ 2,034,092
We incurred expenses totaling $434,702 in the first quarter of 2022 primarily
related to the pending acquisition of Knowmadics. These expenses include legal
and other fees to conduct due diligence and to negotiate and draft legal
Income (Loss) from Operations
Loss from operations was $2,772,979 in the first quarter of 2022 compared to
income from operations of $268,870 in 2021, a difference of $3,041,849. The
decrease in income from operations is the result of the decrease in gross profit
of $643,585 and the increase in SG&A expenses and acquisition costs totaling
$2,398,264, as discussed above.
Liquidity and Capital Resources
As of March 31, 2022, we had $3.0 million of cash on hand consisting of bank
deposits and money market funds. Our business is not fixed asset intensive, and
we have no commitments for capital expenditures. We have two office leases with
lease commitments totaling $0.2 million for the next twelve months and $0.5
million during the remainder of their terms which end in 2024 and 2026. In
connection with the acquisition, we are required to pay the seller of Gray
Matters (the "Seller") $1.5 million in December 2023. Also, the Seller is
entitled to additional consideration of up to $4 million contingent on the
performance of Gray Matters for the year ending December 31, 2022. Our balance
sheet as of March 31, 2022 reflects an estimated $1 million for that contingent
liability. The settlement of that contingent liability which was originally due
by approximately April 30, 2023 has been adjusted, by agreement between the
Company and Seller, to December 2023, to coincide with the payment date of the
deferred consideration due to the Seller.
To meet our liquidity commitments and continue to execute our strategy for the
next twelve months and beyond, assuming we consummate the acquisition of
Knowmadics, we intend to use a combination of cash on hand, the ability of
Legacy IAI, Gray Matters and Knowmadics to generate cash from operations, and
approximately $7.0 million from the approximately $66.5 million we intend to
raise in connection with the pending Knowmadics acquisition, of which no
assurance can be provided. See "-Impact of Acquisitions and Transformation of
Our Business" in our Annual Report for more information on the pending
Knowmadics acquisition and the funds we intend to raise in connection therewith.
To meet our liquidity commitments and continue to execute our strategy through
the end of 2022 and beyond, if we do not consummate the acquisition of
Knowmadics, we intend to use a combination of cash on hand, cash generated from
the operations of Legacy IAI and Gray Matters, and we will reduce our operating
expense cost structure to align with this scenario which will provide additional
operating cash flow.
Based on our current cash position and operating plan, we anticipate that we
will be able to meet our cash requirements for at least one year from the filing
date of this Quarterly Report on Form 10-Q.
We have no off-balance-sheet arrangements that have or are likely to have a
material current or future effect on our financial condition, or changes in
financial condition, liquidity or capital resources or expenditures.
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