FIREFLY NEUROSCIENCE, INC. 10-K

Item 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. Dividends We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends within the foreseeable future. Our management anticipates that all earnings, if any, will be reinvested in our business. Any future dividends will be subject to the discretion of the board of directors and will depend on, among other things, future earnings, our operating and financial condition, our capital requirements, and general business conditions. 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. Item 6. [Reserved] 21 Table of Contents Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report. This discussion, particularly information with respect to our outlook, key trends and uncertainties, our plans and strategy for our business, and our performance and future success, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Part I, Item 1A, “ Risk Factors. ” Overview Beginning in August 2021, we embarked on a transformative strategy to reposition the Company as a leader in the Zero-Trust, blockchain and secure supply chain marketplace. 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 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. After our GMI acquisition, we experienced ongoing delays in generating revenue from the Blockchain SCM business and sustained steady operating cash losses. 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. 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. 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. (“Firefly”), a privately held, commercial-stage, medical technology company, to combine the companies in an all-stock transaction (the "Merger"). 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. 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. 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. 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. 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. Key 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. 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. 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. 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. This decline in gross profit is fully offset by decreases in commissions and other expenses directly related to the sale of third party software. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. There can be no assurance that our efforts to undertake a private placement will be successful. 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. 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. 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. 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. As such, we are required to make certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. 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. 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. ASC 606 prescribes a five-step model for recognizing revenue that includes identifying the contract with the customer, determining the performance obligation(s), determining the transaction price, allocating the transaction price to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. The timing of the satisfaction of performance obligations varies based on whether we are selling a product or service and the contractual terms. Significant judgment can be required in determining certain performance obligations, and these determinations could change the amount of revenue and profit recorded in a given period. Our contracts may have a single performance obligation or multiple performance obligations. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on our best estimate of standalone selling price. The estimate of standalone selling price for each performance obligation constitutes a critical accounting estimate, since it is particularly complex and subjective and prone to change from period to period. Stock-Based Compensation The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense. Determining the inputs for the valuation model requires significant judgment, particularly related to the estimation of stock price volatility. Historically there has been a limited public market for the Company’s stock, and as a result the Company estimates its expected volatility by using the volatility of a pool of several public company issuers that operate within its market segment as a benchmark. The Company adjusts the results of the benchmark analysis on the stock price volatility assumption to reflect differences in the size of the benchmark companies and their capital structures as compared to ours. The selection of comparable companies and the amount of the size adjustment require significant judgment and changes in those assumptions could have a material impact on our reported results of operations. 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. 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. If impairment is indicated based on a comparison of an asset group’s carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Goodwill is not amortized but instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit may be below its carrying value. These circumstances include, but are not limited to, significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s planned revenue or earnings. Management evaluates the recoverability of the Company’s goodwill annually on October 31 or more often as events or circumstances indicate the fair value of a reporting unit is below its carrying value, including goodwill. 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. We have not experienced undue expense beyond those expenses normally incurred in our ordinary course of business in adhering to such rules and regulations. 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