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 following:

  ? 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
    this filing.




  ? Our business is subject to risks related to our acquisition of Gray Matters,
    Inc.




  ? 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
    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.




  ? 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
    operating results.




  ? 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
    compensating us.




  ? 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
    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.




                                       20

--------------------------------------------------------------------------------

  ? 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 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.

Our Business

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 development.

Through our acquisition in April 2021 of Tellenger, Inc. ("Tellenger"), which is now a wholly-owned subsidiary of the Company, we acquired competencies in web-based solutions and cybersecurity. Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics. We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud. We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized. It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the growth in the cybersecurity market.

In December 2021, we announced the reorganization of our entire professional services practice into Tellenger, and as a result, our professional services are contained in a single entity. Through Tellenger, we perform services such as business process re-engineering, cloud migrations, and Software-as-a-Service ("SaaS") implementations on behalf of clients in the private and public sector with an aim to increase productivity, gain efficiencies, and achieve key performance indicators. Tellenger is appraised at Capability Maturity Model Integration (CMMI) Level 3.

                                       21

--------------------------------------------------------------------------------

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

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

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

Revenue

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

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.

                                       22

--------------------------------------------------------------------------------

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




Acquisition Costs

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 documents.

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.

                                       23

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses