FIREFLY NEUROSCIENCE, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   Cautionary Statement Regarding Forward-Looking Statements   This Form 10-Q contains forward-looking statements regarding our business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements. Investors should read and understand the risk factors detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“Annual Report”) and in other filings with the Securities and Exchange Commission.   We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This list highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer. These risks include, among others, the following:     ● Most of our revenue is generated directly or indirectly from U.S. government agencies which may experience an interruption in their funding if the debt ceiling is not raised by the U.S. Congress, which in turn could cause a delay or loss of revenue for us.   ● We have had operating losses in three of each of the last four years and may not achieve or maintain profitability in the future.   ● A portion of our revenue is expected to be generated by sales to government entities, which are subject to a number of challenges and risks.   ● We face intense competition and could lose market share to our competitors, which could adversely affect our business, financial condition, and results of operations.   ● We rely on our management team and other key employees and will need additional personnel to grow our business, and the loss of one or more key employees or our inability to hire, integrate, train and retain qualified personnel, including members for our board of directors, could harm our business.   ● 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.   ● We are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations.   ● We depend on computing infrastructure operated by Microsoft and other third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations.   ● Failure to comply with governmental laws and regulations could harm our business.   ● We are subject to risks associated with our strategic investments, and impairments in the value of our investments could negatively impact our financial results.   ● Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business.   ● The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members.   ● If we are not able to maintain and enhance our brand and our reputation as a provider of high-quality security solutions and services, our business and results of operations may be adversely affected.   In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A of our 2022 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.   18     WaveDancer, Inc.   Form 10-Q March 31, 2023   Our Business   Founded in 1979 as Information Analysis Incorporated, the Company changed its name to WaveDancer, Inc. and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.   On March 17, 2023, the Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). The Company’s retained interest in GMI of 24.9% is accounted for as an equity method investment. 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 2 relate to the Company’s continuing operations. See Note 2 to the unaudited condensed consolidated financial statements for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation.   The Company is an IT provider primarily for the benefit of federal government agencies. At present, we primarily apply our technology, services and experience to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, data analytics, and we are in the process of acquiring talent and expertise in developing cybersecurity and cloud services practices. Our focus is on enterprise IT solutions primarily relating to system modernization, cloud-based solutions and cybersecurity protection.   Since the Company’s inception, we have performed software development and conversion projects for over 100 commercial and government customers including, but not limited to, the Department of Agriculture, Department of Defense, Department of Education, Department of Homeland Security, Department of the Treasury, U.S. Small Business Administration, U.S. Army, U.S. Air Force, Department of Veterans Affairs, and General Dynamics Information Technology (formerly Computer Sciences Corporation, CSRA).   Modernization has been a core competency of the Company for over 20 years. We have modernized over 100 million lines of COBOL code for over 35 governmental and commercial customers. We maintain a pool of skilled COBOL programmers. This provides us with a competitive advantage as the labor pool of such programmers is shrinking as aging software professionals retire. Our business has also historically relied upon the reselling of applications, primarily for forms development.   Through our acquisition in April 2021 of Tellenger, Inc. (“Tellenger”), which is now a wholly owned subsidiary of the Company, we acquired competencies in web-based solutions and cybersecurity. Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics. We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud. We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized. It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the growth in the cybersecurity market.   In December 2021, we announced the reorganization of our entire professional services practice into Tellenger, and as a result, our professional services are contained in a single entity. Through Tellenger, we perform services such as business process re-engineering, cloud migrations, and Software-as-a-Service (“SaaS”) implementations on behalf of clients in the private and public sector with an aim to increase productivity, gain efficiencies, and achieve key performance indicators. Tellenger is appraised at Capability Maturity Model Integration (CMMI) Level 3.   Our Strategy   Our strategy is to grow our business organically as well as through acquisitions. Through the acquisition s of Tellenger in 2021, we began to reposition our legacy professional services business by allocating resources away from third-party product reselling and toward professional services, which management viewed as higher margin. To grow organically, we have hired and plan to continue to hire, business development personnel and intend to become more proactive in bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities.   Results of Continuing Operations – Three Months Ended March 31, 2023 and 2022   Revenue   Total revenue was $2,160,123 for the three months ended March 31, 2023, compared with $2,995,512 in the prior year quarter, a decrease of $835,389, or 27.9%. The decrease in revenue was driven by our de-emphasis of third-party software sales which accounted for just 2.6% of our sales in the first quarter of 2023 as compared to 31.0% in the prior year quarter. Professional services revenue increased by 1.8% to $2,103,458 in the first quarter of 2023 from $2,066,690 in the first quarter of 2022.   19     WaveDancer, Inc.   Form 10-Q March 31, 2023   Gross Profit   Gross profit decreased by $39,672 or 5.7%, to $656,798 for the three months ended March 31, 2023 as compared to $696,470 in the prior year quarter. The decrease in gross profit includes a decrease from professional services of $18,040 and from third-party software sales of $21,632. Professional services gross profit as a percent of revenue declined from 32.7% to 31.2% due to a change in the mix of contracts generating revenue and the related billing rates resulting as well as increases in our costs of labor that outpaced billing rate increases.   Selling, General and Administrative Expenses   The following table shows the major elements of SG&A expenses for the three months ended March 31, 2023 and 2022 and the changes between periods:       2023     2022     Increase/ (Decrease)   Salaries and benefits   $ 566,343     $ 645,490     $ (79,147 ) Stock based compensation     288,171       229,966       58,205   Legal and professional fees     244,870       598,323       (353,453 ) Depreciation & Amortization     54,158       56,556       (2,398 ) Acquisition costs     108,377       434,702       (326,325 ) Software, IT and office expenses     85,542       132,475       (46,933 ) Governance and investor relations     135,173       161,687       (26,514 ) Insurance     65,935       25,651       40,284   Marketing and promotions     8,835       32,229       (23,394 ) All other     54,124       56,453       (2,329 ) Total SG&A   $ 1,611,528     $ 2,373,532     $ (762,004 )   Operating Loss from Continuing Operations   Our operating loss from continuing operations was $954,730 in the first quarter of 2023 compared to $1,677,062 in the corresponding quarter in 2022, a decrease in the loss of $722,332 or 43.1%. The decrease in the loss from operations is primarily the result of the decrease in decrease in SG&A expenses of $762,004, as shown above.   Results of Discontinued Operations – Three Months Ended March 31, 2023 and 2022   The sale of GMI to GMDC occurred on March 17, 2023, and as a result we had approximately two fewer weeks of costs and expenses for GMI for the first quarter of 2023 as compared to the first quarter of 2022, as follows:       2023     2022     Increase/ (Decrease)     Cost of contract fulfillment   $ 74,223     $ 320,405     $ (246,182 )   Operating expenses -                           Salaries and benefits     484,249       234,848       249,401     Depreciation and amortization     85,338       306,789       (221,451 )   Stock based compensation, before forfeitures     65,487       82,210       (16,723 )   Forfeitures of stock options     (407,322 )     -       (407,322 )   Other operating expenses     134,633       151,666       (17,033 )   Change in fair value of contingent consideration     -       12,609       (12,609 )   Gain on disposal of business     (100,615 )     -       (100,615 )   Loss before income tax benefit     (335,993 )     (1,108,527 )     772,534     Income tax benefit     -       1,189,579       (1,189,579 )   Net loss on discontinued operations   $ (335,993 )   $ 81,052     $ (417,045 )     20     WaveDancer, Inc.   Form 10-Q March 31, 2023   Critical Accounting Estimate   Our accounting policies are described in Note 1 of our consolidated financial statements – Organization and Summary of Significant Accounting Policies . Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.   There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 except for two new fair value measures for the first quarter of 2023:   1) the determination of the fair value of the contingent consideration receivable from GMDC, as discussed in Notes 2 and 5 to the accompanying consolidated financial statements, and   2) the determination of the initial fair value of our equity method investment in GMDC as of March 17, 2023.   The determination of the fair value of the contingent consideration is a recurring fair value measure at the end of each reporting period and includes significant judgmental inputs not observable in the market. Significant judgment was employed in determining the assumptions used in the determination of fair value as of March 31, 2023 and, accordingly, changes in assumptions could have a material impact on the increase or decrease in the fair value of contingent consideration recorded in any given period.   Equity Method Investment in GMDC   The Company received 993,768 common shares of GMDC representing 19.0 percent of the fully diluted capitalization. Prior to closing the acquisition on March 17 and through March 31, 2023, GMDC raised $3,000,000 by issuing Series A preferred shares at $1.00 per share representing 57.2 percent of the fully diluted capitalization. The Series A transaction was considered by the Company to be the most reliable indication of the fair value of total equity of GMDC.  We utilized an option pricing model backsolve method (“OPM Backsolve”) to solve for the total equity value that results in a value of Series A equal to its issuance price, and to estimate the fair value of common shares. The significant inputs utilized in the OPM Backsolve include an estimated time to exit of four years, an estimated volatility of 75.0 percent, and a risk-free rate of 4.29 percent. A minority interest discount of 23.5% was also applied.   Liquidity and Capital Resources   On March 31, 2023, the Company had net working capital of $97,217, including cash and cash equivalents of $814,722 and excluding deferred acquisition consideration payable of $1,435,576. We generated a loss from continuing operations of $1,013,959 and on March 31, 2023, had an accumulated deficit of $32,540,753. As discussed below, our ability to generate sufficient cash flows to meet our obligations for the twelve months following the issuance of these financial statements is dependent upon factors which are sufficiently outside of management’s control as to cast substantial doubt about our ability to continue as a going concern.   Cash consideration from the sale of GMI provided the Company with $935,974 of cash in March 2023. The Company will need to raise additional capital to grow its business either organically or through acquisition. The Company is also pursuing strategic alternatives which include the potential merger, reverse merger, or sale of the Company. There is no assurance that our efforts will result in any transactions or provide additional capital, which creates substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying financial statements are issued. We estimate that by the fourth quarter of 2023 the Company will need to raise additional capital to meet its ongoing operating cash flow requirements.   We used cash from continuing operations of $1,071,253 during the first quarter of 2023 and anticipate that over the twelve months from the date of these financial statements our operating activities may use as much as approximately $1.5 million to $2.0 million, including satisfying our current liabilities of $2,178,281 as of March 31, 2023, excluding $1.0 million outstanding under our bank line of credit and the deferred acquisition consideration payable of $1,435,576, as well as our other typical operating expenses, including payroll for our workforce and other costs. The bank line of credit expired on May 16, 2023, and the Company is in discussions with Summit to further extend the line of credit. As discussed in note 12 to the unaudited condensed consolidated financial statements, the Company reached a settlement with the seller of GMI whereby we are no longer obliged to pay the deferred acquisition consideration of $1,435,576 included on the consolidated balance sheet as of March 31, 2023.   The Company has no commitments for capital spending nor any plans for material capital expenditures.   21     WaveDancer, Inc.   Form 10-Q March 31, 2023