WaveDancer, Inc. — Q2 2022 Form 10-Q
Issuer note: The filing is for WaveDancer, Inc. (NASDAQ: WAVD), not Firefly Neuroscience, Inc. It covers the quarter and six months ended June 30, 2022; interim financial statements are unaudited.
Business context
WaveDancer provides IT modernization and professional services, resells third-party software, and, following its December 2021 acquisition of Gray Matters, offers blockchain-enabled supply-chain management software. The company operates as one reportable segment and is pursuing organic growth and acquisitions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $4.32 million | $4.73 million | $7.31 million | $8.15 million |
| Gross profit | $0.93 million | $0.96 million | $1.31 million | $1.98 million |
| Gross margin | 21.5% | 20.2% | 17.9% | 24.2% |
| Operating income (loss) | ($1.72 million) | $0.05 million | ($4.51 million) | $0.32 million |
| Net income (loss) | ($1.53 million) | $0.04 million | ($3.60 million) | $0.31 million |
| Operating cash flow | Not separately presented | Not separately presented | ($4.36 million) | ($0.12 million) |
- Q2 revenue declined 8.8% year over year; six-month revenue declined 10.3%. Lower core professional-services revenue was partly offset by Gray Matters revenue and higher third-party software sales.
- Six-month SG&A rose to $5.95 million from $1.50 million, reflecting higher personnel, legal and professional fees, acquired-intangible amortization, stock compensation, marketing, and other costs. Acquisition costs were $0.79 million, primarily related to the terminated Knowmadics acquisition.
- Q2 results included $0.94 million of noncash income from reducing Gray Matters contingent consideration to zero. For the six-month period, the corresponding income was $0.93 million. The filing says delays in Gray Matters revenue recognition pushed projected revenue and gross profit beyond the earnout measurement period.
Liquidity, debt, and balance sheet
- At June 30, cash and cash equivalents were $0.58 million, down from $4.93 million at year-end 2021. Working capital was approximately $1.0 million; accounts receivable were $3.58 million.
- Total liabilities were $5.45 million and stockholders’ equity was $14.71 million. The filing reports no outstanding bank borrowings; the Summit revolving credit line expired in April 2022. Lease liabilities totaled $0.61 million.
- Other liabilities included $1.37 million of deferred consideration due to the Gray Matters seller on the acquisition’s second anniversary. The company reported an accumulated deficit of $17.04 million.
- After quarter-end, WaveDancer raised $1.875 million gross proceeds in an August 2022 private stock offering. A July 8 agreement also gives the company, at its option and subject to conditions, access to up to $15 million through an equity line with B. Riley Principal Capital II.
Outlook, commentary, and risks
Management said additional capital is required to support its strategy and stated that cash, operating plans, and capital-raising efforts are expected to cover requirements for at least one year from the filing date. The company identified no specific revenue or earnings guidance.
- Management described Gray Matters as an early-stage business requiring investment in sales, marketing, and engineering, and said it did not believe the revenue-recognition delays impaired its longer-term prospects.
- Revenue and gross profit depend substantially on federal contracts and a limited number of prime contractors and subcontracts. One prime contractor’s related subcontracts generated 29.8% of Q2 revenue and 50.5% of Q2 gross profit.
- Other cited risks include execution and integration of acquisitions, the ability to raise capital, potential inability to achieve profitability, reliance on key customers and employees, competition, and adoption of blockchain and supply-chain solutions. The filing reported no material change to the risk factors in the 2021 Form 10-K.
- No legal proceedings were reported. Management concluded disclosure controls were effective as of June 30, 2022; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Confirm the issuer identity: this source is WaveDancer’s filing, despite the request metadata naming Firefly Neuroscience.
- Review the pace of cash use, the company’s ability to collect its enlarged receivables balance, and whether post-quarter financing is sufficient for operations and strategy.
- Track Gray Matters revenue recognition, customer concentration, and any effects on acquired intangible assets and goodwill.
- Assess whether core professional-services revenue stabilizes and whether higher operating expenses can be supported by gross profit growth.
- Reconcile the filing’s small revenue presentation inconsistency: the statements report six-month 2022 revenue of $7,312,894, while MD&A gives $7,312,984 in one passage.