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What changed in FIREFLY NEUROSCIENCE, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FIREFLY NEUROSCIENCE, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+108 added−207 removedSource: 10-K (2024-03-20) vs 10-K (2023-04-17)

Top changes in FIREFLY NEUROSCIENCE, INC.'s 2023 10-K

108 paragraphs added · 207 removed · 71 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

15 edited+13 added−14 removed40 unchanged
Biggest changeCompetition There are hundreds of firms performing traditional information technology services, business intelligence and cybersecurity, and general consulting for the federal government. A great number of them are much larger than we are, and are more established in the marketplace, and have more resources to pursue individual prospects. The competition in the conversion and modernization market is very strong.
Biggest changeA great number of them are much larger than we are, and are more established in the marketplace, and have more resources to pursue individual prospects. The competition in the conversion and modernization market is very strong. Many software professional services companies have had some involvement in this area and profess proficiency in performing these projects.
From 2019 to 2020, Gartner named Adobe as a leader in multiple categories of its Magic Quadrant reporting including, but not limited to, digital experience platforms, personalization engines, CRM lead management, ad tech, digital commerce, and multichannel marketing hubs. 9 Government Regulation We are bound by various rules and regulations promulgated by the federal government and agencies thereunder.
From 2019 to 2020, Gartner named Adobe as a leader in multiple categories of its Magic Quadrant reporting including, but not limited to, digital experience platforms, personalization engines, CRM lead management, ad tech, digital commerce, and multichannel marketing hubs. Government Regulation We are bound by various rules and regulations promulgated by the federal government and agencies thereunder.
Challenges in providing services to citizens throughout the pandemic heightened awareness and accelerated the progress of modernizations efforts with the U.S. Government. Many government agencies became focused on developing their own government digital strategies in order to improve productivity, streamline data sharing, reduce errors and reduce expenses. Automation also gives governments the information they need to make data-driven decisions.
Challenges in providing services to citizens throughout the COVID-19 pandemic heightened awareness and accelerated the progress of modernizations efforts with the U.S. Government. Many government agencies became focused on developing their own government digital strategies in order to improve productivity, streamline data sharing, reduce errors and reduce expenses. Automation also gives governments the information they need to make data-driven decisions.
All of these options are often very expensive and time consuming because they require starting all over in defining requirements, designing structures, programming, and testing. 8 Opportunities for our modernization expertise continue to exist as government agencies and private companies are being driven to modernize for various reasons.
All of these options are often very expensive and time consuming because they require starting all over in defining requirements, designing structures, programming, and testing. 7 Table of Contents Opportunities for our modernization expertise continue to exist as government agencies and private companies are being driven to modernize for various reasons.
We plan to capitalize on these opportunities in outreach and bids to market our relevant products and services. Products and Services While we offer a range of services, historically, two areas of focus for us have been modernization, including cloud services and migrations, and cybersecurity.
We plan to capitalize on these opportunities in outreach and bids to market our relevant products and services. 6 Table of Contents Products and Services While we offer a range of services, historically, two areas of focus for us have been modernization, including cloud services and migrations, and cybersecurity. Each of these areas are more fully described below.
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.
To grow organically, we 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.
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.
If the Merger does not close, we may seek 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.
We have provided modernization solutions to more than 40 government and private sector clients, with a particular focus on modernizing older, proprietary mainframe COBOL applications.
Through our services, we aim to address client requirements, determine the best plan of action, and execute on that plan. We have provided modernization solutions to more than 40 government and private sector clients, with a particular focus on modernizing older, proprietary mainframe COBOL applications.
Many software professional services companies have had some involvement in this area and profess proficiency in performing these projects. We also face competition from other companies that purport to substantially automate the process through software tools including Blue Phoenix Solutions, Fujitsu, and IBM.
We also face competition from other companies that purport to substantially automate the process through software tools including Blue Phoenix Solutions, Fujitsu, and IBM.
With our IT consulting and software development processes appraised at CMMI Level 3 for their ability to consistently deliver high-quality work using metrics to proactively manage risk, we offer a project framework that meets the “gold standard” of larger firms. We constantly monitor project metrics to ensure we are meeting objectives and identifying areas for improvement.
Our IT consulting and software development processes consistently deliver high-quality work using metrics to proactively manage risk. We constantly monitor project metrics to ensure we are meeting objectives and identifying areas for improvement.
Tellenger offers a suite of IT services including consulting, development, training, migration and modernization implementation, and on-site project support. Tellenger’s current contracts extend into 2023 and 2024.
Professional Services The majority of our revenue is derived from services that we provide our U.S. government customers through our subsidiary, Tellenger. Tellenger offers a suite of IT services including consulting, development, training, migration and modernization implementation, and on-site project support. Tellenger’s current contracts extend into 2024 and 2025.
It is difficult to determine the exact size of this segment, but even a minor share of this market would represent significant prospective customers with meaningful opportunities.
It is difficult to determine the exact size of this segment, but even a minor share of this market would represent significant prospective customers with meaningful opportunities. Competition There are hundreds of firms performing traditional information technology services, business intelligence and cybersecurity, and general consulting for the federal government.
All of our billable professionals have at least four years of related experience. For computer-related services, we believe that the diverse professional opportunities and interaction among our employees contribute to maintaining a stable professional staff with limited turnover.
For computer-related services, we believe that the diverse professional opportunities and interaction among our employees contribute to maintaining a stable professional staff with limited turnover. We have no collective bargaining agreements or other such labor contracts with our employees and believe that our employee relationships are satisfactory.
While the arrangement and selection of data can be protected, the actual data is not, and others are free to create software performing the same function. We believe, however, that the creation of competing databases would be very time-consuming and costly. Employees As of December 31, 2022, we had 53 full-time and 8 part-time employees.
While the arrangement and selection of data can be protected, the actual data is not, and others are free to create software performing the same function. Employees As of December 31, 2023, we had 42 full-time and one part-time employees. All of our billable professionals have at least four years of related experience.
Small Business Administration, U.S. Army, U.S. Air Force, U.S. Marine Corps, Department of Veterans Affairs, and General Dynamics Information Technology (formerly Computer Sciences Corporation), publicly traded firms, non-profits, and more. Through WaveDancer’s acquisition of Gray Matters, Inc. (“GMI” or “Gray Matters”) in December 2021, we gained access to blockchain and encryption algorithm technology.
Small Business Administration, U.S. Army, U.S. Air Force, U.S. Marine Corps, Department of Veterans Affairs, and General Dynamics Information Technology (formerly Computer Sciences Corporation), publicly traded firms, non-profits, and more. Our Strategy On November 15, 2023, the Company entered into a merger agreement with Firefly Neuroscience, Inc.
Removed
Gray Matters’ focus is on the supply chain management software market and in United States intelligence, national security and diplomatic organizations. Based on GMI's initial technology we developed a commercial blockchain-enabled platform, called Maverix, to provide end-to-end visibility, transparency, and security over complex supply chains.
Added
On March 17, 2023, the Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI” or "Gray Matters") 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.
Removed
On March 17, 2023, we entered into and closed a Stock Purchase Agreement with Gray Matters Data Corp. (“GMDC”), a company newly formed by StealthPoint LLC, a San Francisco based venture fund, under which the Company sold all of the shares of GMI.
Added
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 1 relate to the Company’s continuing operations.
Removed
In exchange for this sale, the Company received shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred referenced below, approximately a 19.9% interest in the GMDC once GMDC completes its initial anticipated fund raising, cash consideration of approximately $935,000 and contingent annual payments equal to five percent (5%) of GMI’s GAAP based revenue through December 31, 2029 attributable to GMI’s blockchain-enabled digital supply chain management platform and associated technologies.
Added
See Note 2 to the 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.
Removed
The equity interest StealthPoint and other GMDC investors are receiving is in the form of Series A non-participating convertible preferred stock having a one-time liquidation preference and no cumulative dividends. In addition, the Company and GMDC entered into a transition services agreement whereby the Company will continue to provide certain administrative services for GMI.
Added
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 December 31, 2023 the Company has no equity method investment in GMDC, nor any other equity exposure to the GMI business.
Removed
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 total cash paid at closing was $1,000,000.
Added
(“Firefly”), a privately held, commercial-stage, medical technology company, to combine the companies in an all-stock transaction (the "Merger").
Removed
The Company also has the right to appoint a director to GMDC’s board of directors and the right to co-invest in the anticipated Series B preferred stock financing round which we understand Gray Matters Data Corp. intends to consummate in the future. 6 Our Strategy Our strategy is to grow our business organically as well as through acquisitions.
Added
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, one of which will require the Company raising between $0.8 million and $1.1 million of additional capital, as discussed more fully below in "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Removed
With our acquisition of Gray Matters, we began expanding our business by adding blockchain-enabled supply chain management capabilities. Each of these areas are more fully described below. As noted above, on March 17, 2023, we sold an approximate 80.1% equity stake in the Gray Matters business.
Added
In connection with the closing of the Merger, WaveDancer will sell its Tellenger subsidiary, the entity through which WaveDancer operates its day-to-day business, to WaveTop Solutions, Inc., a company owned and controlled by WaveDancer's chairman and chief executive officer.
Removed
Modernization Tellenger’s modernization focus spans legacy system modernizations as well as cloud assessment and migration efforts. Through our services, we aim to address client requirements, determine the best plan of action, and execute on that plan.
Added
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 (“FDA”).
Removed
Blockchain-Enabled Supply Chain Platform With our purchase of Gray Matters we acquired a U.S. government contract to provide a cloud based software platform for tracking, auditing, and monitoring a complex global supply chain.
Added
If the Merger does not close, then we will continue to pursue a strategy of growing our business organically as well as through acquisitions. A strategy of growth through acquisition would require the Company to raise capital to fund the entirety of any acquisitions.
Removed
During 2022, we developed a commercial focused platform, that could also be sold to governmental entities, Maverix, that offers a standard user interface (UI) and user experience (UX) to customers and could also be customized for the defense and intelligence sectors.
Added
Also, as discussed more fully below in the "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company will need to reduce its expense structure and raise capital to fund its ongoing operations in order to be in a position to continue to operate and pursue such a strategy.
Removed
The thesis of the Maverix platform is that it will bring together all transactions, documentation, authorizations – every aspect of a process – in one zero-trust, web-based interface, giving customers an unprecedented level of accountability, auditability, and predictability. 7 In light of delays in generating revenue from the Blockchain SCM business and the need to invest significant additional capital into the business over at least the next two years to cover continuing operating cash losses, along with the uncertainty inherent in any early-stage technology business, the Company concluded that its best course of action was to sell a majority stake in the business.
Added
For the balance of this Item 1 we will discuss the key elements of the strategy that we will pursue if the Merger does not close.
Removed
As explained in Item 1. above, we sold effectively approximately 80.1% of our equity stake in the GMI business to GMDC on March 17, 2023. Professional Services The majority of our revenue is derived from services that we provide our U.S. government customers through our subsidiary, Tellenger.
Added
As noted above, on March 17, 2023, we sold an 75.1% equity stake in the Gray Matters business, and on August 9, 2023, we sold the remaining 24.9%. Modernization Tellenger’s modernization focus spans legacy system modernizations as well as cloud assessment and migration efforts.
Removed
The Company was a major partner in the successful modernization effort of the Small Business Administration (“SBA”) 504 loan program through 2017 and 2018, and we are currently working with those same partners on another modernization effort at the SBA.
Added
Our website address is www.wavedancer.com. 8 Table of Contents
Removed
Upon closing the sale of GMI to GMDC, discussed in Item 1. above, 13 full-time employees resigned from WaveDancer and accepted employment with GMI. We have no collective bargaining agreements or other such labor contracts with our employees and believe that our employee relationships are satisfactory.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

32 edited+3 added−53 removed130 unchanged
Biggest changeOur results of operations have varied significantly from period to period, and we expect that our results of operations, including, but not limited to our GAAP and non-GAAP measures, will continue to vary as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including: ● our ability to attract new and retain existing customers or sell additional solutions to our existing customers; ● changes in our mix of solutions, subscriptions and services sold, including changes in the average contract length for subscriptions and support; ● budgeting cycles, seasonal buying patterns and purchasing practices of customers; ● the timing of new contracts for our solutions and length of our sales cycles; ● changes in customer, distributor or reseller requirements or market needs; ● changes in the growth rate of the digital logistics or IT security market; ● any change in the competitive landscape of the digital logistics or IT security market, including consolidation among our customers or competitors and strategic partnerships entered into by and between our competitors; ● our ability to successfully and continuously expand our business; ● decisions by organizations to purchase digital logistics or IT security solutions from larger, more established security vendors or from their primary IT equipment vendors or IT service providers; ● changes in our pricing policies or those of our competitors; ● the timing and costs related to the development or acquisition of technologies or businesses or strategic partnerships; ● the lack of synergy or the inability to realize expected synergies, resulting from acquisitions or strategic partnerships; ● our inability to execute, complete or integrate efficiently any acquisition that we may undertake; ● increased expenses, unforeseen liabilities, or write-downs and any impact on our operating results from any acquisitions we consummate; ● insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our products and services; ● the cost and potential outcomes of future litigation; ● the departure of key employees; ● seasonality or cyclical fluctuations in our business; ● political, economic and social instability, including with respect to the conflict in Ukraine; ● public health crises, such as the COVID-19 pandemic, and related measures to protect the public health; ● future accounting pronouncements or changes in our accounting policies or practices; ● the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure; and ● the amount and timing of costs related to any cost reduction initiatives and the impact of such initiatives.
Biggest changeOur results of operations have varied significantly from period to period, and we expect that our results of operations, including, but not limited to our GAAP and non-GAAP measures, will continue to vary as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including: ● our ability to attract new and retain existing customers or sell additional services to our existing customers; ● budgeting cycles, seasonal buying patterns and purchasing practices of customers; ● changes in customer, distributor or reseller requirements or market needs; ● the timing of new contracts for our services and length of our sales cycles; ● our ability to successfully and continuously expand our business; ● changes in our pricing policies or those of our competitors; ● the timing and costs related to the development or acquisition of technologies or businesses or strategic partnerships; ● the lack of synergy or the inability to realize expected synergies, resulting from acquisitions or strategic partnerships; ● our inability to execute, complete or integrate efficiently any acquisition that we may undertake; ● increased expenses, unforeseen liabilities, or write-downs and any impact on our operating results from any acquisitions we consummate; ● the cost and potential outcomes of future litigation; ● the departure of key employees; ● seasonality or cyclical fluctuations in our business; ● cyber attacks, security breaches, or other technical difficulties; ● political, economic and social instability, including with respect to the conflicts in Ukraine and the Middle East; ● public health crises, such as the COVID-19 pandemic, and related measures to protect the public health; ● future accounting pronouncements or changes in our accounting policies or practices; ● the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure; and ● the amount and timing of costs related to any cost reduction initiatives and the impact of such initiatives.
The risks we face in connection with acquisitions, including the above-mentioned acquisitions, include: ● diversion of management time and focus from operating our business to addressing acquisition integration challenges; ● our ability to successfully achieve billings and revenue targets of acquired businesses; ● coordination of research and development and sales and marketing functions; ● integration of solution and service offerings; ● retention of key employees from the acquired company; ● changes in relationships with strategic partners as a result of product acquisitions or strategic positioning resulting from the acquisition; 11 ● cultural challenges associated with integrating employees from the acquired company into our organization; ● integration of the acquired company’s accounting, management information, human resources and other administrative systems, as well as the acquired operations, technology and rights to our offerings, and any unanticipated expenses related to such integration; ● the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked sufficiently effective controls, procedures and policies; ● financial reporting, revenue recognition or other financial or control deficiencies of the acquired company that we do not adequately address and that cause our reported results to be incorrect; ● liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; ● completing the transaction and achieving or utilizing the anticipated benefits of the acquisition within the expected timeframe, or at all; ● unanticipated write-offs or charges; and ● litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties which may differ from or be more significant than the risks our business faces.
The risks we face in connection with acquisitions, including the above-mentioned acquisitions, include: ● diversion of management time and focus from operating our business to addressing acquisition integration challenges; ● our ability to successfully achieve billings and revenue targets of acquired businesses; ● coordination of research and development and sales and marketing functions; ● integration of solution and service offerings; ● retention of key employees from the acquired company; ● changes in relationships with strategic partners as a result of product acquisitions or strategic positioning resulting from the acquisition; 9 Table of Contents ● cultural challenges associated with integrating employees from the acquired company into our organization; ● integration of the acquired company’s accounting, management information, human resources and other administrative systems, as well as the acquired operations, technology and rights to our offerings, and any unanticipated expenses related to such integration; ● the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked sufficiently effective controls, procedures and policies; ● financial reporting, revenue recognition or other financial or control deficiencies of the acquired company that we do not adequately address and that cause our reported results to be incorrect; ● liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; ● completing the transaction and achieving or utilizing the anticipated benefits of the acquisition within the expected timeframe, or at all; ● unanticipated write-offs or charges; and ● litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties which may differ from or be more significant than the risks our business faces.
We rely on information technology networks and systems, including the Internet, blockchain and cloud services, many of which are managed by third parties, to securely process, transmit and store electronic information of financial, marketing, legal and regulatory nature to manage our business processes and activities.
We rely on information technology networks and systems, including the Internet and cloud services, many of which are managed by third parties, to securely process, transmit and store electronic information of financial, marketing, legal and regulatory nature to manage our business processes and activities.
Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline. 20 We do not intend to pay dividends for the foreseeable future. We have never declared or paid any dividends on our common stock.
Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline. We do not intend to pay dividends for the foreseeable future. We have never declared or paid any dividends on our common stock.
Many of these third-party providers attempt to impose limitations on their liability for such errors, disruptions, defects, performance deficiencies, or failures, and if enforceable, we may have additional liability to our customers or third-party providers. 13 We have experienced, and may in the future experience, disruptions, failures, data loss, outages, and other performance problems with our infrastructure and cloud-based offerings due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, employee misconduct, capacity constraints, denial of service attacks, phishing attacks, computer viruses, malicious or destructive code, or other security-related incidents, and our disaster recovery planning may not be sufficient for all situations.
Many of these third-party providers attempt to impose limitations on their liability for such errors, disruptions, defects, performance deficiencies, or failures, and if enforceable, we may have additional liability to our customers or third-party providers. 10 Table of Contents We have experienced, and may in the future experience, disruptions, failures, data loss, outages, and other performance problems with our infrastructure and cloud-based offerings due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, employee misconduct, capacity constraints, denial of service attacks, phishing attacks, computer viruses, malicious or destructive code, or other security-related incidents, and our disaster recovery planning may not be sufficient for all situations.
A failure to maintain our relationships with our third-party providers (or obtain adequate replacements), and to receive services from such providers that do not contain any material errors or defects, could adversely affect our ability to deliver effective products and solutions to our customers and adversely affect our business and results of operations. 14 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.
A failure to maintain our relationships with our third-party providers (or obtain adequate replacements), and to receive services from such providers that do not contain any material errors or defects, could adversely affect our ability to deliver effective products and solutions to our customers and adversely affect our business and results of operations. 11 Table of Contents 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.
Any system or service disruptions, including those caused by ongoing projects to improve our information technology systems and the delivery of services, whether through our shared services organization or outsourced services, if not anticipated and appropriately mitigated, could materially and adversely affect our business including, among other things, an adverse effect on our ability to perform on contracts, bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner.
Any system or service disruptions, including those caused by ongoing projects to improve our information technology systems and the delivery of services, including outsourced services, if not anticipated and appropriately mitigated, could materially and adversely affect our business including, among other things, an adverse effect on our ability to perform on contracts, bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner.
If the federal government terminates a contract based upon a default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the federal government in procuring undelivered items from an alternative source and other damages as authorized by law. 15 The failure to generate a sufficient level of professional fees will cause us to sustain losses.
If the federal government terminates a contract based upon a default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the federal government in procuring undelivered items from an alternative source and other damages as authorized by law. 12 Table of Contents The failure to generate a sufficient level of professional fees will cause us to sustain losses.
Although software sales have constituted a significant part of our overall revenue, the gross profit we derive from such sales is very modest, generally less than three percent. Consequently, we are reliant on professional fee revenue to maintain and operate our business.
Although software sales constituted a significant part of our overall revenue until recently, the gross profit we derive from such sales is very modest, generally less than three percent. Consequently, we are reliant on professional fee revenue to maintain and operate our business.
If we are unable to accurately estimate the cost of services and the timeline for completion of contracts, the profitability of our contracts may be materially and adversely affected. Our commercial and federal government contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the cost of providing the services.
If we are unable to accurately estimate the cost of services and the timeline for completion of contracts, the profitability of our contracts may be materially and adversely affected. Our contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the cost of providing the services.
Although we have already hired additional employees to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses. 22 In addition, changing laws, regulations, and standards related to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming.
Although we have already hired additional employees to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses. 16 Table of Contents In addition, changing laws, regulations, and standards related to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming.
Loss of the services of, or failure to recruit, qualified technical and management personnel could limit our ability to successfully complete existing projects and compete for new projects. 23 Our results of operations may vary significantly from period to period, which could cause the trading price of our common stock to decline or fluctuate materially.
Loss of the services of, or failure to recruit, qualified technical and management personnel could limit our ability to successfully complete existing projects and compete for new projects. 17 Table of Contents Our results of operations may vary significantly from period to period, which could cause the trading price of our common stock to decline or fluctuate materially.
The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities related to a cybersecurity attack.
The amount of insurance coverage we maintain may be inadequate to cover losses or liabilities related to a cybersecurity attack.
We must maintain effective internal controls over financial reporting, and if we are unable to do so, the accuracy and timeliness of our financial reporting may be adversely affected, which could have a material adverse effect on our business and stock price.
Risks Related to Tax, Accounting, Compliance and Regulation We must maintain effective internal controls over financial reporting, and if we are unable to do so, the accuracy and timeliness of our financial reporting may be adversely affected, which could have a material adverse effect on our business and stock price.
This may in turn adversely affect our results of operations and growth prospects. 19 Failure to comply with governmental laws and regulations could harm our business.
This may in turn adversely affect our results of operations and growth prospects. 14 Table of Contents Failure to comply with governmental laws and regulations could harm our business.
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.
Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new service offerings could reduce our ability to compete and could harm our business.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutive issuances of equity securities.
Future acquisitions could also result in dilutive issuances of equity securities, as happened with our Gray Matters acquisition. There is also a risk that future acquisitions will result in the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses or the write-off of goodwill, any of which could harm our financial condition or operating results.
There is also a risk that future acquisitions will result in the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses or the write-off of goodwill, any of which could harm our financial condition or operating results.
If we are unsuccessful in identifying, developing and marketing our services and technology or adapting our business to rapid technological change, it will have a material negative impact on our results of operations. 26 Item 1B. Unresolved Staff Comments None.
If we are unsuccessful in identifying, developing and marketing our services and technology or adapting our business to rapid technological change, it will have a material negative impact on our results of operations. 19 Table of Contents
From time to time, we are and may become subject to legal proceedings and claims, such as claims brought by our customers in connection with commercial disputes, employment claims made by our current or former employees, intellectual property claims, or securities class actions or other claims related to our business or any volatility in the trading price of our common stock. 25 Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, financial condition, and results of operations.
From time to time, we are and may become subject to legal proceedings and claims, such as claims brought by our customers in connection with commercial disputes, employment claims made by our current or former employees, intellectual property claims, or securities class actions or other claims related to our business or any volatility in the trading price of our common stock.
We may need to engage a third-party proxy solicitor if we obtain too little response to a proxy solicitation. 21 Risks Related to Financing In the future, we may seek to enter into credit facilities to help fund our working capital needs. These credit facilities may expose us to additional risks associated with leverage and may inhibit our operating flexibility.
We may need to engage a third-party proxy solicitor if we obtain too little response to a proxy solicitation. 15 Table of Contents Risks Related to Financing In the future, we may seek to enter into credit facilities to help fund our working capital needs.
The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans, or exercise of the related warrants, or otherwise will dilute all other stockholders.
Enforcement actions, litigation, and sanctions could harm our business, operating results, and financial condition. Risks Related to Our Common Stock The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans, or exercise of the related warrants, or otherwise will dilute all other stockholders.
If we fail to meet such expectations for these or other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits. 24 If we fail to effectively manage our growth, if such growth occurs, our business, financial condition and results of operations would be harmed.
If we fail to meet such expectations for these or other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits. 18 Table of Contents Any litigation against us could be costly and time-consuming to defend.
If we violate any such covenants, our lenders could accelerate the maturity of any debt outstanding, and we may be prohibited from making any distributions to our stockholders.
Such credit facilities will likely require us to pay a commitment fee on the undrawn amount and will likely contain a number of affirmative and restrictive covenants. If we violate any such covenants, our lenders could accelerate the maturity of any debt outstanding, and we may be prohibited from making any distributions to our stockholders.
A decision to terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects, financial condition and results of operations. 16 Risks Related to Intellectual Property and Technology Licensing 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.
Risks Related to Intellectual Property and Technology Licensing Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or services without compensating us.
Risks Related to Cybersecurity Incidents, Privacy and Data Protection 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. In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products, and services.
Any of these events would have a material adverse effect on our business, financial condition, and operating results. 13 Table of Contents Risks Related to Cybersecurity Incidents, Privacy and Data Protection 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.
Any failure to increase our revenue and manage our cost structure as we grow our business could prevent us from achieving or, if achieved, maintaining profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
We have had operating losses in three of each of the last four years and may not achieve or maintain profitability in the future. We have incurred operating losses in each of four of the last five years, including net losses of $17,753,838, $1,131,449, $717,246 and $51,034 during the years ended December 31, 2022, 2021, 2019 and 2018, respectively.
We have incurred losses in four of the last five years, including net losses of $2,034,435, $17,753,838, $1,131,449, and $717,246 during the years ended December 31, 2023, 2022, 2021, and 2019, respectively. Any failure to increase our revenue and manage our cost structure as we grow our business could prevent us from achieving or, if achieved, maintaining profitability.
Our employees, other than our chief executive officer and chief financial officer, work for us on an “at-will” basis, which means they may terminate their employment with us at any time. We do not maintain key person life insurance policies on any of our key employees. If Mr.
Our employees work for us on an “at-will” basis, which means they may terminate their employment with us at any time. Our continued success is dependent upon our ability to hire, retain and utilize qualified personnel.
Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption. 18 Risks Related to Tax, Accounting, Compliance and Regulation If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption.
We may seek to enter into credit facilities with third-party lenders to help fund our business. Such credit facilities will likely require us to pay a commitment fee on the undrawn amount and will likely contain a number of affirmative and restrictive covenants.
These credit facilities may expose us to additional risks associated with leverage and may inhibit our operating flexibility. We may seek to enter into credit facilities with third-party lenders to help fund our business.
Any of the above factors, including sanctions, export controls, tariffs, trade wars and other governmental actions, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares to decline. 12 Risks Related to our Business The following risk factors relate to our consulting and software development services, which we provide through our wholly-owned subsidiary, Tellenger.
Risks Related to our Business The following risk factors relate to our consulting and software development services, which we provide through our wholly-owned subsidiary, Tellenger. We have had operating losses in four of the last five years and may not achieve or maintain profitability in the future.
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Risks Related to the Conflict in Ukraine The Russian invasion of Ukraine may expand into a broader international conflict that could adversely affect multiple channels of commerce and markets. The Russian invasion of Ukraine and resulting market volatility, could adversely affect our business, financial condition, or results of operations.
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A decision to terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects, financial condition and results of operations.
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In response to the conflict between Russia and Ukraine, the U.S. and other countries have imposed sanctions or other restrictive actions against Russia.
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In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products, and services.
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Our pricing structures for our solutions and services may change from time to time. We expect that we may change our pricing model from time to time, including as a result of competition, global economic conditions, and general reductions in our customers’ spending levels, pricing studies, or changes in how our solutions are broadly consumed.
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Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, financial condition, and results of operations.
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Similarly, as we introduce new products and services, or as a result of the evolution of our existing solutions and services, we may have difficulty determining the appropriate price structure for our products and services.
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In addition, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically.
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Moreover, as we continue to target selling our solutions and services to larger organizations, these larger organizations may demand substantial price concessions. In addition, we may need to change pricing policies to accommodate government pricing guidelines for our contracts with federal, state, local, and foreign governments and government agencies.
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If we are unable to modify or develop pricing models and strategies that are attractive to existing and prospective customers, while enabling us to significantly grow our sales and revenue relative to our associated costs and expenses in a reasonable period of time, our business, financial condition, and results of operations may be adversely impacted.
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Any of these events would have a material adverse effect on our business, financial condition, and operating results. 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.
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Our products and subscriptions contain software modules licensed to us by third-party authors under open-source licenses. Some open-source licenses contain requirements that we make available applicable source code for modifications or derivative works we create based upon the type of open-source software we use.
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If we combine our proprietary software with open-source software in a certain manner, we could, under certain open-source licenses, be required to release the source code of our proprietary software to the public.
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This would allow our competitors to create similar products or subscriptions with lower development effort and time and ultimately could result in a loss of product sales for us.
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Although we monitor our use of open-source software to avoid subjecting our products and subscriptions to conditions we do not intend, the terms of many open-source licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products and subscriptions.
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From time to time, there have been claims against companies that distribute or use open-source software in their products and subscriptions, asserting that open-source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights in what we believe to be licensed open-source software.
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If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products and subscriptions on terms that are not economically feasible, to reengineer our products and subscriptions, to discontinue the sale of our products and subscriptions if reengineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition.
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In addition to risks related to license requirements, usage of open-source software can lead to greater risks than use of third-party commercial software, as open-source licensors generally do not provide warranties or assurance of title or controls on origin of the software.
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In addition, many of the risks associated with usage of open-source software, such as the lack of warranties or assurances of title, cannot be eliminated, and could, if not properly addressed, negatively affect our business.
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We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open-source software, but we cannot be sure that our processes for controlling our use of open-source software in our products and subscriptions will be effective. 17 We intend to license technology from third parties, and our inability to maintain those licenses could harm our business.
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We may incorporate technology that we intend to license from third parties, including software, into our products and subscriptions. We cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our products and subscriptions.
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In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Some of our agreements with our licensors may be terminated for convenience by them.
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We may also be subject to additional fees or be required to obtain new licenses if any of our licensors allege that we have not properly paid for such licenses or that we have improperly used the technologies under such licenses, and such licenses may not be available on terms acceptable to us or at all.
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If we are unable to continue to license any of this technology because of intellectual property infringement claims brought by third parties against our licensors or against us, or claims against us by our licensors, or if we are unable to continue our license agreements or enter into new licenses on commercially reasonable terms, our ability to develop and sell products and subscriptions containing such technology would be severely limited, and our business could be harmed.
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Additionally, if we are unable to license necessary technology from third parties, we may be forced to acquire or develop alternative technology, which we may be unable to do in a commercially feasible manner or at all, and we may be required to use alternative technology of lower quality or performance standards.
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This would limit and delay our ability to offer new or competitive products and subscriptions and increase our costs of production. As a result, our margins, market share, and operating results could be significantly harmed.
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The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.
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We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue, and expenses that are not readily apparent from other sources.
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For more information, refer to the section entitled “Critical Accounting Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.
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In general, if our estimates, judgments, or assumptions relating to our critical accounting policies change or if actual circumstances differ from our estimates, judgments or assumptions, including uncertainty in the current economic environment due to COVID-19, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
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Enforcement actions, litigation, and sanctions could harm our business, operating results, and financial condition. Risks Related to Our Common Stock Our actual operating results may differ significantly from our guidance.
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From time to time, we have released, and may continue to release, guidance in our quarterly earnings releases, quarterly earnings conference calls, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our management.
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These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect to the projections.
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Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties, and contingencies, many of which are beyond our control, such as COVID-19, and are based upon specific assumptions with respect to future business decisions, some of which will change.
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The rapidly evolving market in which we operate may make it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed.
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However, actual results will vary from our guidance and the variations may be material. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook as of the date of release with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.
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Investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
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Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in our actual operating results being different from our guidance, and the differences may be adverse and material.
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We remain highly dependent on the services of Jamie Benoit, our Chief Executive Officer, who is critical to our thought leadership, market presence, reputation, future vision, and strategic direction. We are also substantially dependent on the continued service of our existing engineering personnel because of the complexity of our solutions.
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Engineering personnel and other employees in the technology industry, including the cybersecurity industry, are increasingly able to work remotely, which in turn increases employee mobility and our risk of unwanted employee attrition.
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Our competitors and other companies in the technology industry may be successful in recruiting and hiring members of our management team or other key employees, including key employees obtained through our acquisitions, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms, or at all.
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Also, to the extent we hire employees from mature public companies with significant financial resources, we may be subject to allegations that such employees have been improperly solicited, or that they have divulged proprietary or other confidential information or that their former employers own such employees’ inventions or other work product.
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We have made a number of organizational changes over the past year and, from time to time, key personnel may leave our company. Leadership transitions and management changes can be inherently difficult to manage, may cause uncertainty or a disruption to our business, and may increase the likelihood of turnover in other key officers and employees.
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Our success depends in part on having a successful leadership team. If we cannot effectively manage these and other leadership transitions and management changes, it could make it more difficult to successfully operate our business and pursue our business goals.
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Benoit or one or more of our other key employees resigns or otherwise ceases to provide us with their service, our business could be harmed. Our continued success is dependent upon our ability to hire, retain and utilize qualified personnel.
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There is no assurance that we will be able to successfully implement or scale improvements to our systems, processes, and controls or that such systems, processes and controls will be effective in preventing or detecting errors, omissions or fraud. As part of our efforts to improve our internal systems, processes, and controls, we might license technology from third parties.
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The support services available for such third-party technology might be outside of our control and may be negatively affected by consolidation in the software industry.
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In addition, if we do not receive adequate support for the software underlying our systems, processes and controls, our ability to provide solutions and services to our customers in a timely manner may be impaired, which may cause us to lose customers, limit us to smaller deployments of our platform or increase our technical support costs.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe Annapolis sub-lease will expire on October 31, 2024. We believe that our current physical space is adequate to meet our current needs. We will continue to evaluate our needs for office space and make changes as and when our needs change.
Biggest changeThe Annapolis sub-lease will expire on October 31, 2024. We believe that our current physical space is adequate to meet our current needs.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeOther than the foregoing, 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 4. Mine Safety Disclosures Not applicable. 27 PART II
Biggest changeItem 3. 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 4. Mine Safety Disclosures Not applicable. 20 Table of Contents PART II
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Item 3. Legal Proceedings On January 25, 2023, Jeffrey Gerald, the individual from whom the Company purchased all the outstanding shares of GMI, filed a lawsuit against the Company in the Superior Court of the State of Delaware.
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In this case, Gerald sued for the one year’s severance of $150,000 and benefits to which he claims he is entitled under his employment agreement with the Company.
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He has 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 the anticipatory breach to release from escrow 436,481 shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement.
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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 Company’s counterclaim does not specify the damages being sought.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 28 PART II 29 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 29 Item 6. [Reserved] 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 37 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 20 PART II 21 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21 Item 6. [Reserved] 21 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8.
Financial Statements and Supplementary Data. 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 37 Item 9A. Controls and Procedures. 37
Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 Item 9A. Controls and Procedures 26

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeItem 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock began trading on the NASDAQ Capital Market (“NASDAQ”) under the symbol “WAVD” on November 26, 2021.
Biggest changeItem 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is listed on the NASDAQ Capital Market (“NASDAQ”) under the trading symbol “WAVD”. Holders As of December 31, 2023, we had 205 holders of record of our Common Stock.
Recent Sales of Unregistered Securities There were no unregistered sales of equity securities during the year ended December 31, 2022 that were not disclosed by the Company on a Current Report on Form 8-K.
Recent Sales of Unregistered Securities There were no unregistered sales of equity securities during the year ended December 31, 2023 that were not disclosed by the Company on a Current Report on Form 8-K. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None.
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Prior to trading on NASDAQ, our common stock started trading on the OTCQB market on January 15, 2021 under the symbol “IAIC.” Prior thereto, our common stock traded on the OTC Pink Market and the OTC Bulletin Board. Holders As of December 31, 2022, we had 195 holders of record of our Common Stock.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers On July 15, 2022, an employee tendered 30,435 shares of our common stock to facilitate a cashless exercise of incentive stock options. We did not repurchase any of our equity securities during 2022.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeKey Factors Affecting Our Performance We believe that our performance and future success depend on a number of factors that present significant opportunities for us, as discussed in Part I, Item 1, “Business,” but also pose risks and challenges, as discussed in Part I, Item 1A, “Risk Factors.” 29 Results of Operations The following table sets forth, for the periods indicated, selected information from our Consolidated Statements of Operations and the notes to the consolidated financial statements, expressed as a percentage of revenue: Consolidated Year Ended December 31, 2022 2021 Revenues Professional fees 77.7 % 70.5 % Software sales 22.3 % 29.5 % Total revenues 100.0 % 100.0 % Cost of revenues Cost of professional fees 57.6 % 47.1 % Cost of software sales 20.9 % 28.8 % Total cost of revenues excluding depreciation and amortization 78.5 % 75.9 % Gross profit 21.5 % 24.1 % Selling, general and administrative expenses 100.4 % 41.5 % Change in fair value of contingent consideration -7.7 % 0.0 % Impairment of long-lived assets 31.3 % 0.0 % Goodwill impairment 53.7 % 0.0 % Loss from operations -156.2 % -17.4 % Other income (expense): Interest expense -0.7 % -0.2 % Other income (expenses), net 0.1 % 0.1 % Gain on forgiveness of note payable 0.0 % 3.0 % Loss before income tax benefit -156.8 % -14.5 % Income tax benefit 9.1 % 7.1 % Net loss -147.7 % -7.4 % Prior to the acquisition of GMI and through June 30, 2022, we managed our business as a single operating segment.
Biggest changeKey Factors Affecting Our Performance We believe that our performance and future success depend on a number of factors that present significant opportunities for us, as discussed in Part I, Item 1, “Business,” but also pose risks and challenges, as discussed in Part I, Item 1A, “Risk Factors.” 22 Table of Contents Results of Operations The following table sets forth, for the periods indicated, selected information from our Consolidated Statements of Operations and the notes to the consolidated financial statements, expressed as a percentage of revenue: Year Ended December 31, 2023 2022 Revenues Professional fees 97.6 % 75.7 % Software sales 2.4 % 24.3 % Total revenues 100.0 % 100.0 % Cost of revenues Cost of professional fees 64.9 % 51.3 % Cost of software sales 2.3 % 22.8 % Total cost of revenues excluding depreciation and amortization 67.2 % 74.1 % Gross profit 32.8 % 26.0 % Selling, general and administrative expenses 73.2 % 75.1 % Gain on litigation settlement (18.1 %) 0.0 % Operating loss from continuing operations (22.3 %) (49.1 %) Gain on sale of equity investment and settlement of contingent consideration receivable 4.8 % 0.0 % Other income, net 0.1 % 0.1 % Interest expense (1.3 %) (0.7 %) Loss from continuing operations before income taxes and equity in net loss of affiliate (18.7 %) (49.7 %) Income tax (benefit) expense (0.5 %) 7.4 % Net loss from continuing operations before equity in net loss of affiliate (18.2 %) (57.1 %) Equity in net loss of affiliate (3.1 %) 0.0 % Net loss from continuing operations (21.3 %) (57.1 %) Loss from discontinued operations (4.2 %) (103.9 %) Net loss (25.5 %) (161.0 %) 23 Table of Contents Revenue Revenue decreased by 27.6%, or $3.0 million, from $11.0 million in 2022 to $8.0 million in 2023.
In December 2021, we acquired Gray Matters, Inc. (“GMI”) whose blockchain and encryption algorithm technology was built to solve real-world problems through purpose-built innovation in secure Supply Chain Management (SCM) in United States government organizations. After closing on the GMI acquisition, we focused on the second of our two intended foundational acquisitions, Knowmadics, Inc.
In December 2021, we acquired Gray Matters, Inc. (“GMI” or "Gray Matters") whose blockchain and encryption algorithm technology was built to solve real-world problems through purpose-built innovation in secure Supply Chain Management (SCM) in United States government organizations. After closing on the GMI acquisition, we focused on the second of our two intended foundational acquisitions, Knowmadics, Inc.
(“KMI”), a leading Internet of Things (IoT) remote device management and monitoring platform company. After announcing a definitive agreement in March of 2022, we terminated the agreement with KMI on June 6, 2022 due to our inability to raise the funds required to complete the deal under its original terms.
(“KMI”), a leading Internet of Things (IoT) remote device management and monitoring platform company. After signing a definitive agreement in March of 2022, we terminated the agreement with KMI on June 6, 2022 due to our inability to raise the funds required to complete the deal under its original terms.
Since historically most of our business is derived from contracts either directly with the U.S. federal government or as a subcontractor on behalf of U.S. federal government customers, most of our contracts are subject to termination at the election of the government. 36
Since historically most of our business is derived from contracts either directly with the U.S. federal government or as a subcontractor on behalf of U.S. federal government customers, most of our contracts are subject to termination at the election of the government. 25 Table of Contents
Changes in the assumptions and conditions included in these critical accounting estimates can materially impact our future financial results. 34 Revenue Recognition We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.
Revenue Recognition We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract with a customer to transfer a good or service to the customer.
The actual results could be different from these estimates. Our critical accounting estimates are those where we have made particularly difficult, subjective or complex judgments.
The actual results could be different from these estimates. Our critical accounting estimates are those where we have made particularly difficult, subjective or complex judgments. Changes in the assumptions and conditions included in these critical accounting estimates can materially impact our future financial results.
That contract generated approximately $0.1 million in gross profit in 2021. During 2022, we continued to de-emphasize sales of third-party software products because they have generated very low gross profits in the 2.4% to 6.2% range (as shown in the table above) and also require relatively significant administrative effort.
During 2023, we continued to de-emphasize sales of third-party software products because they have generated very low gross profits of 0.9% and 6.2% in 2023 and 2022, respectively, and also require relatively significant administrative effort.
In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets or asset groups that contain those assets.
Management evaluates the recoverability of the Company’s finite-lived intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets or asset groups that contain those assets.
This net decrease includes a decrease in professional services revenue of 21.2%, or $2.2 million and a decrease in revenue from sales of third-party software, primarily Adobe products, of 39.7% or $1.8 million. Approximately $1.9 million, or 83%, of the $2.2 million decrease in services revenue is attributable to our largest software modernization program.
This net decrease includes a decrease in professional services revenue of 6.6%, or $0.6 million and a decrease in revenue from sales of third-party software, primarily Adobe products, of 92.9% or $2.5 million.
Critical Accounting Estimates Our significant accounting policies are described in Note 1 to our accompanying consolidated financial statements. We consider the accounting policies related to revenue recognition to be critical to the understanding of results of operations. We prepare our financial statements in conformity with accounting principles generally accepted in the United States.
The Company has no commitments for capital spending nor any plans for material capital expenditures. 24 Table of Contents Critical Accounting Estimates Our significant accounting policies are described in Note 1 to our accompanying consolidated financial statements. We prepare our financial statements in conformity with accounting principles generally accepted in the United States.
On March 17, 2023, the Company sold effectively approximately 80.1% of the equity of its GMI subsidiary to Gray Matters Data Corporation (“GMDC”), whose lead investor is StealthPoint LLC, a venture capital fund, for cash of $0.9 million, approximately 19.9% of the voting securities of GMDC, and future cash payments contingent upon future GMI revenues.
In the fourth quarter of 2022, the Company concluded that its likely best course of action was to divest of the Blockchain SCM business and on March 17, 2023, the Company sold approximately 75.1% of the equity of its GMI subsidiary to Gray Matters Data Corporation (“GMDC”) for cash of $0.9 million, approximately 24.9% of the voting securities of GMDC, and future cash payments contingent upon future GMI revenues.
Gross Profit Gross profit decreased by $0.8 million, or 21.6%, from $3.7 million in 2021 to $2.9 million in 2021, with gross profit percentage increasing from 24.3% to 26.0%. This net decrease in gross profit is nearly all attributable to professional services, with $0.9 million of lower gross profit from our largest software modernization program discussed in Tellenger Revenue above.
Gross Profit Gross profit decreased by $0.3 million, or 8.7%, from $2.9 million in 2022 to $2.6 million in 2023, with gross profit percentage increasing from 26.0% to 32.8%. This net decrease in gross profit is primarily attributable to $0.2 million of lower gross profit from third party product sales.
As of December 31, 2021, the Company had a single operating and reportable segment. Government Regulation We are bound by various rules and regulations promulgated by the federal government and agencies thereunder. We have not experienced undue expense beyond those expenses normally incurred in our ordinary course of business in adhering to such rules and regulations.
We have not experienced undue expense beyond those expenses normally incurred in our ordinary course of business in adhering to such rules and regulations.
If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the reporting unit carrying amount exceeds the estimated fair value of the reporting unit. 35 Prior to the acquisition of GMI and through June 30, 2022, we managed our business as a single operating segment.
If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the reporting unit carrying amount exceeds the estimated fair value of the reporting unit. Government Regulation We are bound by various rules and regulations promulgated by the federal government and agencies thereunder.
As a result of the sale of GMI, the Company’s current business remains its longstanding and legacy government services business through which the Company provides professional services for the benefit of government agencies. In the medium and long term, the Company will need to raise additional capital to grow its business either organically or through acquisitions.
As a result of the sale of GMI, the Company’s business reverted solely to its longstanding and legacy government services business through which the Company provides professional services for the benefit of government agencies. On November 15, 2023, the Company entered into a merger agreement with Firefly Neuroscience, Inc.
The fair values of option awards granted in 2022 and 2021 were estimated using the Black-Sholes option pricing model under the following assumptions: 2022 2021 Risk-free interest rate 1.88% - 4.26% 0.46% - 1.26% Dividend yield 0% 0% Expected term 3.25 years – 6 years 2.5 years – 5 years Expected volatility 45.8% - 48.1% 46.0% - 92.0% Business Combinations and Acquired Intangible Assets We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.
The fair values of option awards granted in 2023 and 2022 were estimated using the Black-Sholes option pricing model under the following assumptions: 2023 2022 Risk-free interest rate 4.6 % 1.9% - 4.3% Dividend yield 0 % 0 % Expected term (years) 3.25 - 3.50 3.25 - 6.00 Expected volatility 33.5% - 36.7% 45.8% - 48.1% Goodwill, Intangible Assets and Other Long-lived Assets Management evaluates the recoverability of the Company’s indefinite-lived intangible assets (tradenames) annually on October 31, or more often when events or circumstances indicate a potential impairment exists.
In August 2022, we sold 1,572,506 unregistered shares of our common stock in a private offering at a price of $1.20 per share from which we raised aggregate gross proceeds of $1,887,000.
As of December 31, 2023 the Company had $0.5 million outstanding under its bank line of credit and no borrowing availability. In September, 2023, we sold 35,000 unregistered shares of our common stock in a private offering at a price of $5.00 per share from which we raised aggregate gross proceeds of $175,000.
As of December 31, 2022, the Company had working capital of $0.3 million, excluding deferred acquisition consideration of $1.4 million and including cash and cash equivalents of $0.7 million, and had an accumulated deficit of $31.2 million. As of December 31, 2022 the Company had availability of $0.6 million under its bank line of credit.
Liquidity and Capital Resources During the year ended December 31, 2023, the Company generated a net loss from continuing operations of $1.7 million. As of December 31, 2023, the Company had a working capital deficit of less than $0.1 million, including cash and cash equivalents of $0.7 million.
Removed
Beginning in late 2021 and through the third quarter of 2022, we hired salespeople, marketers, and software engineers, developed, and implemented sales and marketing programs, and expanded our compliance, governance, and administrative infrastructure to support this transformative strategy. The result has been a sharp increase in operating expenses in 2022 as compared to 2021.
Added
After our GMI acquisition, we experienced ongoing delays in generating revenue from the Blockchain SCM business and sustained steady operating cash losses.
Removed
During the third quarter of 2022, GMI experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, resulted in a decline in the reporting unit’s estimated future cash flows.
Added
On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and settled the contingent consideration receivable, which was valued at $682,000 for financial reporting purposes, for a one-time cash payment of $1,000,000. See Note 2 to the consolidated financial statements for further information about the sale of GMI.
Removed
The delays in realizing revenue and gross margin in GMI coupled with the increase in operating expense resulted in negative operating cash flows for full year 2022 of $6.0 million.
Added
(“Firefly”), a privately held, commercial-stage, medical technology company, to combine the companies in an all-stock transaction (the "Merger").
Removed
In light of the continuing delays in generating revenue from the Blockchain SCM business and the need to invest significant additional capital into the business over at least the next two years to cover continuing operating cash losses, along with the uncertainty inherent in any early-stage technology business, the Company concluded, in the fourth quarter, that its likely best course of action was to divest of the Blockchain SCM business.
Added
The closing of the transaction is contingent upon the approval of WaveDancer and Firefly shareholders as well as satisfaction of other closing conditions including, among other things, approval of the shareholders of both WaveDancer and Firefly, the Company having sufficient cash to satisfy all its outstanding liabilities as of the closing date, and approval by Nasdaq Capital Markets LLC ("Nasdaq") of Firefly's initial listing application.
Removed
See Note 19 to the financial statements for further information about this transaction. The cash consideration and the elimination of cash expenses from the Blockchain SCM operating segment provide the Company with additional short-term liquidity.
Added
In connection with and nearly simultaneous with the closing of the Merger, WaveDancer will sell its Tellenger subsidiary, the company through which WaveDancer operates its day-to-day business, to WaveTop Solutions, Inc., a company owned and controlled by WaveDancer's chairman and chief executive officer, for $1.5 million of cash.
Removed
The Company is evaluating strategic alternatives which include the potential merger or sale of the Company, including a reverse merger with a private company. Alternatives we consider will most likely require stockholder approval under the rules of the Nasdaq Stock Market.
Added
Upon closing, 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 (“FDA”). Since late last year, we have been devoting our efforts to closing the Merger with Firefly.
Removed
During the quarter ended September 2022, we reassessed our business strategy and our CODM changed his approach to managing the business and allocating resources. As a result, we determined that beginning July 1, 2022 we had two operating segments: Tellenger and Blockchain SCM.
Added
If the Merger does not close, we will need to make fundamental decisions as to how to proceed with our business. We anticipate that we will confront delisting from the Nasdaq Stock Market. The standalone business of our operating subsidiary, Tellenger, is profitable but cannot support the administrative expenses of being a public reporting company.
Removed
Tellenger provides professional services, primarily to U.S. government agencies, related to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, and data analytics. The Blockchain SCM segment is an early-stage business focused on developing, marketing, and selling a SaaS supply chain management platform built on blockchain technology.
Added
In addition, we will lack the required capital to satisfy our liabilities and we may need to consider a sale of Tellenger to acquire the capital necessary to satisfy these liabilities or attempt to achieve work-out arrangements with our creditors.
Removed
For purposes of discussing our results of operations, we will discuss revenue and gross profit for the discrete Blockchain SCM and Tellenger segments and operating expenses will be discussed on a combined basis.
Added
This decline in gross profit is fully offset by decreases in commissions and other expenses directly related to the sale of third party software.
Removed
Where possible and meaningful, we discuss specific elements of operating expenses, such as impairments of long-lived assets and goodwill, with reference to the operating segment responsible for such operating expense. 30 The following table summarizes revenue and gross profit by segment: Tellenger Blockchain SCM Consolidated 2022 2021 2022 2021 2022 2021 Revenue: Professional services $ 8,347,052 $ 10,592,278 $ 998,970 $ - $ 9,346,022 $ 10,592,278 Third-party software 2,675,930 4,441,226 - - 2,675,930 4,441,226 Total revenue 11,022,982 15,033,504 998,970 - 12,021,952 15,033,504 Gross profit: Professional services 2,695,627 3,549,357 (282,685 ) (39,846 ) 2,412,942 3,509,511 Third-party software 167,216 106,105 - - 167,216 106,105 Total gross profit $ 2,862,843 $ 3,655,462 $ (282,685 ) $ (39,846 ) $ 2,580,158 $ 3,615,616 Gross profit %: Professional services 32.3 % 33.5 % -28.3 % na 25.8 % 33.1 % Third-party software 6.2 % 2.4 % na na 6.2 % 2.4 % Total 26.0 % 24.3 % -28.3 % na 21.5 % 24.1 % Tellenger Revenue Revenue decreased by 26.7%, or $4.0 million, from $15.0 million in 2021 to $11.0 million in 2022.
Added
Selling, General and Administrative Expenses ( “ SG&A") SG&A expenses decreased from $8.2 million in 2022 to $5.8 million, a decrease of 29.1%, in 2023 as follows: 2023 2022 Increase/ (Decrease) Salaries and benefits $ 2,124,562 $ 2,719,057 $ (594,495 ) Stock based compensation 710,550 1,276,455 (565,905 ) Legal and professional fees 828,931 1,549,507 (720,576 ) Depreciation & Amortization 217,236 220,192 (2,956 ) Acquisition costs 714,409 889,696 (175,287 ) Software, IT and office expenses 376,358 428,564 (52,206 ) Governance and investor relations 318,852 435,432 (116,580 ) Insurance 351,498 224,327 127,171 Marketing and promotions 2,233 105,777 (103,544 ) All other 197,503 432,794 (235,291 ) Total SG&A $ 5,842,132 $ 8,281,801 $ (2,439,669 ) Gain on Litigation Settlement In 2023, we had a gain of $1.4 million on the settlement of litigation.
Removed
In 2021, we deployed significant resources to achieve particular milestones while in 2022 the level of effort required from us has declined resulting in lower revenue in 2022 versus 2021.
Added
As discussed in Note 9 to the consolidated financial statements, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, were engaged in litigation about Mr.
Removed
The balance of the approximately $0.3 million remaining net decrease in revenue includes incremental revenue as a result of having the Tellenger acquisition for all of 2022 versus just under nine months in 2021, partially offset by a forms modernization program that ended in 2021 having delivered $0.6 million in revenue.
Added
Gerald's termination as an employee of the Company as well as whether the Company should be required to pay the deferred consideration of $1.5 million that would have been payable on December 10, 2023.
Removed
Gross profit from forms modernization services increased from $0.2 million in 2021 to $0.4 million in 2022, notwithstanding the loss of $0.6 million in revenue from one contract that ended in 2021.
Added
The Company and Gerald settled the litigation, resolving all outstanding matters between them, including termination of the $1.5 million deferred consideration obligation under the terms of the GMI acquisition agreement. Net Loss For 2023 we had a net loss of $2.0 million versus $17.8 million in 2022.
Removed
The improvement in gross profit percentage for third-party software sales from 2021 to 2022, is a result of our eliminating very low gross margin sales in 2022 versus 2021. Blockchain SCM Revenue We had $1.0 million of revenue in 2022 as compared to zero for the 21 days in 2021 when we owned GMI.
Added
The primary drivers of the $15.7 million reduction in net loss in 2023 include the inclusion in the 2022 net loss of impairment losses of $10.2 million in our GMI business which was sold in 2023, a reduction of other GMI losses of $1.0 million, reduced operating expenses in 2023 from continuing operations of $2.4 million, and the $1.4 million gain on litigation settlement in 2023.
Removed
At the time of our acquisition of GMI it was in the midst of performing under a prime contract with a U.S. government (“USG”) entity to finalize its supply chain management platform (“Doubtfire”) and gain authority to operate (“ATO”) with that customer.
Added
The Company's current focus is on closing the Merger. Under the terms of the Merger Agreement, we must have Parent Net Cash of no less than zero on the closing date.
Removed
Achievement of ATO is a critical milestone for both expanding the scope of GMI’s initial customer’s use of the platform as well as providing the ability to offer the platform to other USG entities. In the first quarter of 2022 the platform was authorized for use on Amazon Web Services’ GovCloud.
Added
Parent Net Cash means the amount of cash on hand, including the proceeds from the Tellenger Sale transaction of $1.5 million, less all of our liabilities - other than the operating liabilities associated with Tellenger - on the closing date, including transaction costs and severance obligations.
Removed
AWS GovCloud authorization is necessary for our web-based platforms to be accessed by USG agencies. During the second quarter of 2022, we continued to work towards achieving ATO and in the second quarter we recognized $0.5 million of revenue in connection with those efforts.
Added
We estimate that the Company will need to raise between $0.8 million and $1.1 million of additional capital in order to reach the minimum required Parent Net Cash amount. To raise this capital, we intend to conduct a private placement, the funding of which will be contingent on the Merger closing.
Removed
During the third quarter of 2022, we expended significant time addressing myriad issues identified by our customer with Doubtfire and related processes. In December 2022, we billed and recognized, and subsequently collected, an additional $0.5 million of revenue associated with continued development and maintenance of Doubtfire.
Added
There can be no assurance that our efforts to undertake a private placement will be successful.
Removed
However, as of the date of issuing our financial statements Doubtfire has not yet been granted ATO and it is uncertain when or if ATO will be granted. 31 Gross Profit During 2022, we had $1.3 million of costs related to the Doubtfire platform and revenue of $1.0 million, resulting in negative gross profit of $0.3 million.
Added
If the Company and Firefly are unable to raise the capital required to consummate the Merger, which for the Company is approximately $0.8 million to $1.0 million, and the Merger transaction does not close, we will likely be delisted from the Nasdaq as a result of not meeting the minimum stockholders’ equity requirement for continued listing, unless we are able to develop a plan for raising our stockholders’ equity that is acceptable to Nasdaq.
Removed
The negative margin is due to unanticipated issues with Doubtfire that caused us to expend significant time and resources to resolve. The delays in achieving ATO adversely impacted our ability to generate follow-on sales and gross profit and was a key element of the Company’s decision to divest GMI.
Added
If the Merger does not close and we are delisted, we would implement an expense reduction program and may cease to be a reporting company, which would reduce our operating expenses significantly. We would also likely need to raise additional capital to meet our liquidity commitments through the end of 2024 and beyond.
Removed
Change in Fair Value of Contingent Consideration Under the terms of the Gray Matters purchase agreement, the Seller was eligible to receive up to $4,000,000 of additional consideration, payable in cash, based on the amounts of revenue and gross profit achieved by GMI for the year ended December 31, 2022 (the “Earnout Period”).
Added
We may also need to pursue arrangements with our creditors to defer or curtail our obligations if we are unable to reduce our expenses quickly enough or raise additional capital.
Removed
In the purchase accounting for GMI in the fourth quarter of 2021, we recorded a contingent liability of $930,000 based on our estimate for GMI’s expected performance for 2022, which liability is marked to estimated fair value at each balance sheet date with changes in fair value being a component of our loss from operations.
Removed
Since that initial estimate there have been delays in the timing of realizing revenue, as well as delays in obtaining new customer contracts which, together, have pushed a material amount of the projected revenue and related gross profit outside of the Earnout Period.
Removed
As of June 30, 2022 we estimated that the contingent consideration was no longer probable of being realized by the seller and reduced the contingent consideration liability to zero.
Removed
During the 2022 Earnout Period GMI generated revenue of $998,970 and gross profit of negative $318,337, neither of which meet the minimum revenue and gross profit thresholds for additional consideration of $3,500,000 and $1,500,000, respectively. The result of writing down the contingent liability to zero has been the recognition of non-cash operating income of $930,000.
Removed
Impairment of Long-lived Assets and Goodwill The delays in GMI achieving ATO have resulted in a decline in its estimated future cash flows for this operating segment.
Removed
Accordingly, we performed an interim goodwill impairment test of the GMI reporting unit as of September 30, 2022, prior to our annual impairment test and the estimated fair value of the Gray Matters reporting unit was determined to be lower than its carrying value.
Removed
In the third quarter of 2022, we recorded a non-cash pre-tax and after-tax charge of $2,254,624 to impair the carrying value of this reporting unit’s goodwill. In the fourth quarter 2022, further developments required us to further assess the carrying value of the GMI reporting unit.
Removed
In December 2022, the Company entered into negotiations with an unrelated investor to provide the capital required to continue to support the Blockchain SCM business.
Removed
On January 18, 2023, we executed a non-binding letter of intent to sell all of the shares of GMI to the investor (“Buyer”) in exchange for a mix of cash, Buyer common stock, and contingent consideration (the “January LOI”).
Removed
While the Company continues to believe in the long-term commercial viability of its Blockchain SCM product, it will continue to incur losses and will require additional cash investment before it can generate positive cash flow.
Removed
We identified the ongoing discussions with the Buyer and arms-length negotiations of fair value of our Gray Matters reporting unit as a trigger event for purposes of assessing impairment of our Gray Matters reporting unit.
Removed
As a result, in addition to our annual impairment test performed as of October 31, 2022, we performed an additional impairment test as of December 31, 2022.
Removed
We further determined that the consideration negotiated with the Buyer under the January LOI was the most objective measure available of the fair value of the GMI reporting unit as of December 31, 2022.
Removed
As a result of the December 31, 2022 impairment testing of the GMI reporting unit we recorded an impairment of long-lived assets of $3,762,915 and an impairment for the remaining balance of goodwill of $4,205,544, bringing the total goodwill impairment to $6,460,168 for 2022. 32 Consolidated Expenses and Net Loss Selling, General and Administrative Expenses ( “ SG&A") SG&A expenses increased from $6.2 million in 2021 to $12.1 million in 2022 as follows: 2022 2021 Increase Blockchain SCM $ 3,782,882 $ 125,787 $ 3,657,095 Tellenger 2,252,090 -- -- Corporate 6,029,711 -- -- Sub-total Tellenger and Corporate 8,281,801 6,116,978 2,164,823 $ 12,064,683 $ 6,242,765 $ 5,821,918 The following table shows the major components of SG&A expenses and the changes from 2021 to 2022.
Removed
We acquired our Blockchain SCM operating segment in December, 2021 and 2022 expenses include a full year of expenses while 2021 had less than one month. 2022 2021 Increase Salaries and benefits $ 4,056,845 $ 2,114,517 $ 1,942,328 Stock based compensation 1,967,927 1,868,897 99,030 Legal and professional fees 1,604,657 424,970 1,179,687 Depreciation & Amortization 1,443,314 236,598 1,206,716 Acquisition costs 889,696 754,781 134,915 Software, IT & office expenses 546,217 274,576 271,641 Governance and investor relations 435,432 304,739 130,693 Recruiting 286,215 9,091 277,124 Marketing and promotions 235,940 52,241 183,699 All other 598,440 202,355 396,085 Total SG&A $ 12,064,683 $ 6,242,765 $ 5,821,918 Gain on Debt Forgiveness In 2021, we had $0.5 million of gain on debt forgiveness related to the Paycheck Protection Program and no gain on debt forgiveness for 2022.
Removed
Income Taxes We recorded a tax benefit of $1.1 million in 2022 and 2021. In connection with our acquisitions of Tellenger and Gray Matters in 2021, we recorded deferred tax liabilities that arise because we have intangible assets that will be amortized for book purposes but not for tax purposes.
Removed
The recording of these liabilities in 2021 has the effect of allowing us to recognize tax benefits that arose in prior years, primarily related to net operating loss carryforwards, that we were unable to recognize previously. See Note 12 in the notes to the consolidated financial statements for details.
Removed
Net Loss For 2022 we had a net loss of $17.8 million versus $1.1 million in 2021.
Removed
The $16.7 million increased loss in 2022 includes $10.2 million of impairment charges related to GMI, additional net operating losses of the Blockchain SCM segment of $3.0 million, Tellenger gross profit decrease of $0.8 million, $0.5 million gain on debt forgiveness in 2021 versus none in 2022, and increases of $2.2 million in other selling, general and administrative expenses. 33 Liquidity and Capital Resources During the year ended December 31, 2022, the Company generated a loss from operations of $18.8 million, which includes impairment charges of long-lived assets and goodwill at its Blockchain SCM segment totaling $10.2 million.
Removed
Beginning in late 2021 and through the third quarter of 2022 we hired salespeople, marketers, and software engineers, developed, and implemented sales and marketing programs, and expanded our compliance, governance, and administrative infrastructure to support this transformative strategy to enter the Blockchain SCM business.

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