Filing summary
Entity mismatch: The supplied filing is WaveDancer, Inc.’s Form 10-Q, not a filing for Firefly Neuroscience, Inc. This summary reflects WaveDancer’s filing for the quarter ended September 30, 2022. The interim financial statements are unaudited.
Business context and reporting period
WaveDancer provides IT modernization and professional services, resells third-party software, and is developing a blockchain-based supply-chain management (SCM) platform through its Gray Matters acquisition. It reports two segments: Tellenger and Blockchain SCM. Management says its strategy is to build a zero-trust, blockchain-enabled cybersecurity business, while shifting resources toward professional services and away from low-margin software resale.
Financial performance and liquidity
| Metric | Three months ended September 30, 2022 | Nine months ended September 30, 2022 |
|---|---|---|
| Revenue | $2.31 million | $9.62 million |
| Gross profit / margin | $0.48 million / 20.9% | $1.79 million / 18.6% |
| Operating loss | $4.74 million | $9.25 million |
| Net loss | $4.70 million | $8.30 million |
| Loss per share, basic and diluted | $0.26 | $0.47 |
For the nine months, operating cash outflow was $5.10 million, compared with $0.43 million in the prior-year period. Investing cash outflow was $0.23 million; financing provided $1.92 million, primarily from stock issuance. Cash fell to $1.52 million at September 30 from $4.93 million at December 31, 2021.
At September 30, working capital was $1.28 million, current assets were $3.36 million, and current liabilities were $2.08 million. Total liabilities were $3.98 million and stockholders’ equity was $12.63 million. The company had no outstanding debt and reported $1.00 million available under a revolving credit line. It also had $1.39 million of deferred acquisition consideration included in other liabilities.
Material changes versus the prior comparable periods
- Third-quarter revenue declined 46.4% year over year; nine-month revenue declined 22.7%. Management attributed the declines mainly to lower professional-services activity on certain contracts and its decision to reduce low-margin third-party software sales.
- Gross profit declined 50.8% in the quarter and 39.5% for the nine months. Tellenger’s third-quarter professional-services gross margin rate fell to 30.7% from 34.5%.
- SG&A rose to $2.93 million in the quarter from $1.02 million, and to $8.88 million for the nine months from $2.52 million. Management cited increased personnel, professional fees, acquired-intangible amortization, and stock-based compensation.
- Gray Matters recorded no segment revenue in the third quarter and had negative gross profit of $0.26 million for the quarter. Delayed government-customer milestone approvals also led to a $2.25 million non-cash goodwill impairment.
- For the nine months, a $0.93 million non-cash gain from reducing the Gray Matters contingent-consideration liability partly offset operating expenses. Acquisition costs were $0.83 million, primarily related to the terminated Knowmadics transaction.
Outlook, risks, and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern for at least one year from issuance of the statements. It expects operating cash use over the next 12 months may exceed the approximately $5 million used in the first nine months of 2022 and says additional capital is required.
- Potential funding sources include the $1 million bank line and an equity line with B. Riley, which permits—but does not require—sales of up to $15 million of stock. The filing says the equity line may not meaningfully meet capital needs without higher share price and trading volume. No shares had been sold under it by September 30.
- Management intends to continue investing in SCM, pursue growth and possible acquisitions or mergers, and implement measures to reduce operating expenses. It provides no quantified revenue or earnings guidance and notes there is no assurance additional capital will be available.
- Gray Matters depends on a key government customer; delays in milestone approvals affected revenue timing, cash-flow expectations, contingent consideration, and goodwill valuation. Management warns further declines in projected cash flows could put the reporting unit at risk of future impairment.
- Customer and supplier concentration is significant: one prime contractor accounted for 49.9% of third-quarter revenue, and one prime contractor represented 66.8% of accounts receivable at quarter-end. Government contracts and a major third-party software supplier are also important to revenue.
- In August, WaveDancer raised $1.89 million gross by selling 1,572,506 shares at $1.20 per share. The filing also identifies risks involving acquisitions, market acceptance of SCM and cybersecurity offerings, competition, key personnel, technology and cybersecurity, and access to capital.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing names WaveDancer, Inc., not Firefly Neuroscience, Inc.
- Assess whether available cash, the bank line, and prospective equity financing can cover the company’s expected cash needs and address the stated going-concern uncertainty.
- Track government-customer milestone approvals, Gray Matters revenue conversion, segment gross margins, and any further goodwill impairment.
- Review the causes and sustainability of the sharp increase in SG&A and operating cash outflows, including planned expense reductions.
- Monitor customer concentration, the contingent/deferred acquisition obligations, and potential share dilution from future equity financing and outstanding equity awards.