FIREFLY NEUROSCIENCE, INC. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Chief Executive Office and Chief Financial Officer, and people performing similar functions, has evaluated the effectiveness of the design and operation of our controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period reported in this Annual Report (the “Evaluation Date”). Based upon this evaluation, our Chief Executive Office and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information required to be disclosed was accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting None. 26 Table of Contents Management ’ s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, (the "Evaluation Date"), based on the criteria for effective internal control described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that our internal control over financial reporting was effective as of the Evaluation Date. This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. Item 9B. Other Information None . Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 27 Table of Contents PART III Item 10. Directors, Executive Officers, and Corporate Governance Directors The following sets forth certain information, as of February 29, 2024, about each member of our Board of Directors (the “Board”), including an account of their specific business experience; the names of publicly held and certain other corporations of which they also are, or have been within the past five years, directors; and a discussion of their specific experience, qualifications, attributes or skills that led to the conclusion that they should serve as directors. Our Certificate of Incorporation provides that our Board is divided into three classes, Class I, Class II, and Class III, with members of each class typically serving staggered three-year terms. Name of Director Age Director Since Position with the Company Paul B. Becker 62 2021 Director G. James Benoit Jr. 52 2021 Director, CEO and Chairman James C. DiPaula, Jr. 61 2021 Director Jack L. Johnson, Jr. 67 2021 Director William H. Pickle 74 2015 Director Bonnie K. Wachtel 68 1992 Director Paul B. Becker , Rear Admiral, USN (ret), age 62, is a former Naval Intelligence Officer and senior executive with a unique combination of business, military, cyber and leadership experience. As the CEO of “The Becker T3 Group” consultancy he founded in 2016, he leverages an outstanding network of U.S. and international security leaders to provide clients with an understanding of National Security trends and activities. He’s successfully developed and implemented all-source intelligence strategies for large, diverse international teams. From 2016 to 2017, Paul led the Presidential Transition’s Intelligence Community Landing Team which provided policy input, strategic guidance and operational counsel to a new administration. He served as Director of Intelligence for the Joint Chiefs of Staff beginning in 2013. Additional military service includes Director of Intelligence for the U.S. Pacific Command in Hawaii and the International Security Assistance Force Joint Command in Afghanistan, commanding officer of CENTCOM’s Joint Intelligence Center in Tampa, and Assistant Naval Attaché to France. Rear Admiral Becker is the recipient of the National Intelligence Community and Department of Defense’s Distinguished Service Medals, and the Ellis Island Medal of Honor. The Naval Intelligence Community recognized RADM Becker in 2016 by establishing the “Teamwork, Tone, Tenacity” leadership award in his honor. He holds a Master’s degree in Public Administration from Harvard's Kennedy School of Government and a Bachelor of Science from the U.S. Naval Academy. A dynamic public speaker and author, his articles and presentations have been widely published. 28 Table of Contents G. James Benoit, Jr. age 52 , has spent his career devoted to the intelligence and national security missions of the United States. From 2009 to 2019, he served as the CEO of FedData and Domain5, a pair of technology companies supplying secure hardware, engineering, analytics, network engineering and computer network operations support services to the National Intelligence Community and the Department of Defense. On his watch, FedData grew from start-up to nearly $500 million in revenue and over $30 million in earnings. In 2015, Mr. Benoit led FedData through the acquisition of a distressed asset and successfully turned the asset around. He sold FedData in 2018, earning the stockholders and private equity partners an IRR greater than 80%. As CEO, Mr. Benoit secured over $300 million in asset-based credit facilities, $40 million in revolving facilities and over $75 million in senior unsecured debt. Mr. Benoit most recently led FedData through the successful capture of a 5-year, more than $500 million, contract supporting the intelligence community. Mr. Benoit retired as CEO of FedData in December 2019. Prior to becoming FedData’s CEO, Mr. Benoit’s career spanned distinguished service as an officer in the United States Army, important work in civilian government, and work in the private sector. A licensed attorney, he spent several years at prominent law firms where he worked on a range of matters including corporate formation, mergers and acquisitions, securities, leveraged buyouts, banking and finance. Mr. Benoit is a graduate of St. Mary’s College of Maryland, the University of Baltimore and the Georgetown University Law Center. A lifelong resident of Annapolis, he lives with his wife and three children. James C. “ Chip ” DiPaula, Jr. , age 61, is Co-President of the Digital Commerce Division of Ascential plc. Mr. DiPaula is Co-Founder of Flywheel Digital, a pioneering digital advertising firm that optimizes ecommerce sales for the world’s largest brands. Flywheel was acquired in 2018 by Ascential, plc. Mr. DiPaula’s public sector experience includes serving as Chief of Staff to the Governor of Maryland from 2005 to 2007 and serving as the youngest Secretary of the Maryland Department of Budget & Management in state history from 2003 to 2005. In this capacity, he oversaw development of a $26 billion state budget and resolved $4 billion in budget deficits through performance-based budgeting. Mr. DiPaula received his Bachelor of Science degree in Business Administration from Towson University. Jack L. Johnson, Jr. , 67, is the CEO and Managing Partner for Jack Johnson and Associates, a strategic consulting firm located in McLean, VA. The firm specializes in providing business and risk consulting to clients domestically and internationally, particularly in the areas of business risk, pre- and post-sale merger and acquisition support, business integration as well as in-depth security assessments. Previously he was a Partner and Sector Leader with Guidehouse Consulting, and its legacy firm, PricewaterhouseCoopers (PwC), where he led the firm’s large Defense Sector Practice after previously serving as Sector Leader for its Homeland Security and Law Enforcement sector. Before joining PwC in 2005, Mr. Johnson served as the first Chief Security Officer (CSO) for the newly formed Department of Homeland Security (DHS). In this capacity, he was directly involved in the establishment of DHS after 9/11 and integrating the 22 agencies that now comprise the Department. His previous government service before his appointment at DHS consisted of over 20 years with the United States Secret Service, rising to the position of Deputy Assistant Director, and serving in a wide range of managerial and executive assignments of increasing responsibility and complexity. His career included the full range of investigative, protective, and intelligence-related duties, both domestically and internationally, as well as assignments with various Presidents, Vice Presidents, Presidential candidates, and foreign heads of state. Prior to being commissioned as a Secret Service Agent in 1983, he was a Police Officer and Detective for Fairfax County, Virginia Police Department, and also is a veteran of the United States Army. Mr. Johnson received his Bachelor of Science degree from the University of Maryland, a Master’s in Forensic Science degree from George Washington University and has completed additional post-graduate study at the University of Virginia and Johns Hopkins School of Management. He has previously testified on multiple occasions before Congress on homeland security and national security-related issues and is a frequent speaker at many national and international conferences, seminars, and symposiums. 29 Table of Contents William H. Pickle , 74, is a government affairs/business development consultant with over 30 years of experience at senior levels within the federal government. Since 2007, Mr. Pickle has served as President of The Pickle Group, LLC, a Washington DC-based business development company. Mr. Pickle served as the 37th Sergeant at Arms (SAA) of the United States Senate. Mr. Pickle was nominated for this senior position by Senate Majority Leader Bill Frist and elected by the Senate in March 2003. He was re-elected in January 2005. In this position, Mr. Pickle served as the Senate's Chief Operating Officer, Chief of Protocol, Chief of Security; and managed over 950 Senate employees and an annual budget exceeding $200 million. As SAA, Mr. Pickle worked closely with Senators, Committees and senior Senate staff on a daily basis. In addition, as the SAA, he served as Chairman of the U.S. Capitol Police Board with direct oversight for a 2200 person police department with a budget of $300 million. Prior to his Senate service, Mr. Pickle served in several Senior Executive Service (SES) positions within the Executive Branch, which included being the first SES Director of the Transportation Security Administration and a Deputy Inspector General of the Department of Labor. Most of Mr. Pickle's career was spent with the United States Secret Service where he rose steadily through the ranks from Special Agent to Senior Executive. Mr. Pickle served as Executive Assistant Director responsible for the Congressional and Legislative Affairs program of the Secret Service from 1991 to 1998. Mr. Pickle is a decorated Vietnam War Veteran who served with the 1st Cavalry Division in 1968-69. Among his awards are the Bronze Star, Purple Heart, 7 Air Medals (2 for valor), 3 Army Commendation Medals, Vietnamese Cross of Gallantry, and the Combat Infantry Badge. Mr. Pickle served on the President's Medal of Valor Award Committee and currently serves on numerous not-for-profit and corporate boards. He was a member of the 2004 Presidential Election Advisory Committee. Bonnie K. Wachtel , 68, is a principal of Wachtel & Co., Inc., a boutique investment firm based in Washington, D.C. Her career spans investment banking, valuation consulting, and oversight of financial reporting and internal controls. Ms. Wachtel has been a director of six Nasdaq-listed companies since joining her firm in 1984, and currently serves on the Board of VSE Corporation (VSEC), a provider of engineering services principally to federal government clients. From November 2013 through 2021, she was a director of The ExOne Company, (XONE), a global provider of 3D printing machines, products, and services. Her securities industry experience includes service on the Advisory Committee for the National Market System Consolidated Audit Trail, LLC, an entity created by order of the SEC, and ten years on the Hearing Panel for Nasdaq Listing Qualifications. Ms. Wachtel holds B.A. and M.B.A. degrees from the University of Chicago and a J.D. from the University of Virginia. She is a Chartered Financial Analyst (CFA). Ms. Wachtel is a trusted resource with regard to business strategy, public markets, merger and acquisition opportunities, corporate governance, regulatory compliance, and risk management. Given her background and occupation, she is qualified to be the audit committee’s financial expert. 30 Table of Contents Executive Officers The following table sets forth the name, age (as of February 29, 2024) and position of each of our executive officers. Name of Executive Officer Age Position With Company G. James Benoit, Jr. 52 Chief Executive Officer and Chairman Timothy G. Hannon 60 Chief Financial Officer G. James Benoit, Jr , was appointed Chairman and Chief Executive Officer in August 2021. See description under directors above. Timothy G. Hannon , was appointed Chief Financial Officer on September 29, 2021. From June 2021 until his permanent appointment as CFO, Mr. Hannon had been a Managing Director at GlassRatner Advisory & Capital Group, LLC d/b/a B. Riley Advisory Services. From March 2017 until June 2021, Mr. Hannon served as VP Finance & Corporate Controller and then as Chief Financial Officer of Ready Pac Foods, Inc. (“RPF”) d/b/a Bonduelle Fresh Americas, a wholly owned subsidiary of Bonduelle SA, a French publicly traded company. From May 2016 to March 2017, Mr. Hannon was an outside consultant to RPF in connection with Bonduelle’s acquisition of RPF. Prior thereto, Mr. Hannon was the chief financial officer for several privately held enterprises. He began his career with Arthur Andersen & Co. in New York where he was primarily assigned to audits of publicly traded companies. Mr. Hannon graduated from the State University of New York at Albany with a bachelor’s degree in accounting and is a certified public accountant. Family Relationships There are no family relationships among any of our directors or executive officers. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, there were no officers, directors and 10% beneficial owners who failed to file on a timely basis the forms required under Section 16(a) of the Exchange Act during our 2023 fiscal year. Code of Business Conduct and Ethics We have adopted a code of ethics that applies to our directors, officers, and employees The code of ethics is available on our website at www.wavedancer.com on the Governance Documents page under the Investors heading. Any amendments to the code, or any waivers of its requirements, will be disclosed on our website. 31 Table of Contents Procedures for Stockholder Nominations to the Board of Directors Under our bylaws, a stockholder (“Proposing Stockholder”) must provide written notice to the Secretary of the Company at the principal executive offices of the Corporation: (x) not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, in advance of the anniversary of the previous year's annual meeting if such meeting is to be held on a day which is not more than 30 days in advance of the anniversary of the previous year's annual meeting or not later than 60 days after the anniversary of the previous year's annual meeting; and (y) with respect to any other annual meeting of stockholders, not earlier than the close of business on the 120th day prior to the annual meeting and not later than the close of business on the later of: (1) the 90th day prior to the annual meeting and (2) the close of business on the tenth day following the first date of public disclosure of the date of such meeting. The Proposing Stockholder’s notice must include: (i) the name, age, business address, and residence address of each nominee proposed in such notice; (ii) the principal occupation or employment of each such nominee; (iii) the class and number of shares of capital stock of the Company which are owned of record and beneficially by each such nominee (if any); (iv) such other information concerning each such nominee as would be required to be disclosed in a proxy statement soliciting proxies for the election of such nominee as a director in an election contest (even if an election contest is not involved) or that is otherwise required to be disclosed, under Section 14(a) of the Exchange Act; (v) a written questionnaire with respect to the background and qualification of such proposed nominee (which questionnaire shall be provided by the Secretary upon written request) and a written statement and agreement executed by each such nominee acknowledging that such person: (A) consents to being named in the Company's proxy statement as a nominee and to serving as a director if elected, (B) intends to serve as a director for the full term for which such person is standing for election, and (vi) as to the Proposing Stockholder: (A) the name and address of the Proposing Stockholder as they appear on the Company’s books and of the beneficial owner, if any, on whose behalf the nomination is being made, (B) the class and number of shares of the Company which are owned by the stockholder (beneficially and of record) and owned by the beneficial owner, if any, on whose behalf the nomination is being made, as of the date of the Proposing Stockholder's notice, and a representation that the Proposing Stockholder will notify the Company in writing of the class and number of such shares owned of record and beneficially as of the record date for the meeting within five business days after the record date for such meeting, (C) a description of any agreement, arrangement, or understanding with respect to such nomination between or among the Proposing Stockholder or the beneficial owner, if any, on whose behalf the nomination is being made and any of their affiliates or associates, and any others (including their names) acting in concert with any of the foregoing, and a representation that the Proposing Stockholder will notify the Company in writing of any such agreement, arrangement, or understanding in effect as of the record date for the meeting within five business days after the record date for such meeting, (D) a description of any agreement, arrangement, or understanding (including any derivative or short positions, profit interests, options, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the Proposing Stockholder's notice by, or on behalf of, the Proposing Stockholder or the beneficial owner, if any, on whose behalf the nomination is being made and any of their affiliates or associates, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of such person or any of their affiliates or associates with respect to shares of stock of the Corporation, and a representation that the Proposing Stockholder will notify the Company in writing of any such agreement, arrangement, or understanding in effect as of the record date for the meeting within five business days after the record date for such meeting, (E) representation that the Proposing Stockholder is a holder of record of shares of the Company entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and (F) a representation whether the Proposing Stockholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation's outstanding capital stock required to approve the nomination and/or otherwise to solicit proxies from stockholders in support of the nomination. 32 Table of Contents Audit Committee We have a separately designated standing audit committee. This committee currently has three members, Bonnie K. Wachtel (Chairperson), James C. DiPaula, Jr., and Paul B. Butler. Our Audit Committee has the authority to retain and terminate the services of our independent registered public accountants, reviews annual financial statements, considers matters relating to accounting policy and internal controls, and reviews the scope of annual audits. All members of the Audit Committee meet the current independence standards promulgated by the SEC and by the NASDAQ Stock Market; as such standards apply specifically to members of audit committees. The Board has determined that Ms. Wachtel is our “audit committee financial expert,” as the SEC has defined that term in Item 407 of Regulation S-K. The current audit committee charter is available for viewing on our Web site at www.wavedancer.com on the Governance Documents page under the Investors heading. Item 11. Executive Compensation The Summary Compensation Table below sets forth compensation information for (i) those individuals who served as the Chief Executive Officer during 2023, (ii) up to two other individuals serving as executive officers on December 31, 2023 and (iii) up to two additional individuals for whom disclosure would have been provided under (ii) hereof but for the fact they were not serving as an executive officer on December 31, 2023 (collectively “Named Executive Officers”): Summary Compensation Table Name and principal position (a) Year (b) Salary 1 ($) (c) Bonus ($) (d) Option awards 2 ($) (f) All other compensation 3 ($) (i) Total ($) (j) G. James Benoit Jr. 2023 131,563 - 8,363 3,591 143,517 Chief Executive Officer 2022 181,311 - 115,200 2,681 299,192 Timothy G. Hannon 2023 250,000 - 8,363 7,100 265,463 Chief Financial Officer 2022 250,313 - 537,050 5,050 792,413 1 During 2022 Mr. Benoit and Mr. Hannon elected to forego portions of their salaries and received stock option awards instead. The salary amounts foregone and included in column (c) for Mr. Benoit was $89,870 and for Mr. Hannon was $25,000. Mr. Benoit and Mr. Hannon were granted 36,000 stock options and 4,000 stock options, respectively, on November 21, 2022. See note 2 below for further details on these grants. 2 Amounts in column (f) reflect the aggregate grant date fair value computed in accordance with ASC Topic 718 of the options to purchase shares of our common stock. These amounts do not represent amounts the named executive officers received or are entitled to receive. The assumptions used in the valuation of these awards can be found in Note 13 to our consolidated financial statements. The amounts do not reflect the risk the awards may be forfeited in certain circumstances and, for awards that are subject to performance conditions, the risk there is no payout because the performance conditions are not met. The vesting of all option awards granted to executive officers in 2023 and 2022 are subject only to the term of service. The 2023 option awards for Mr. Benoit represents an award of 12,500 options on November 3, 2023, exercisable at $2.03 per share with approximately 4,167 shares exercisable on each of October 28, 2024, 2025 and 2026., and expiring on October 31, 2028. The 2022 option award for Mr. Benoit represents an award of 36,000 options on November 21, 2022, exercisable at $8.60 per share with 12,000 shares exercisable on each of November 21, 2023, 2024 and 2025, and expiring on November 21, 2032. The 2023 option awards for Mr. Hannon represents an award of 12,500 options on November 3, 2023, exercisable at $2.03 per share with approximately 4,167 shares exercisable on each of October 28, 2024, 2025 and 2026, and expiring on October 31, 2028. The 2022 option awards for Mr. Hannon represent an award of 25,000 shares on March 22, 2022, exercisable at $49.90 per share with 7,500 shares exercisable on each of March 22, 2023, 2024 and 2025, and expiring on March 22, 2032, and an award of 4,000 options on November 21, 2022, exercisable at $8.60 per share with approximately 1,333 shares exercisable on each of November 21, 2023, 2024 and 2025, and expiring on November 21, 2032. 3 Amounts in column (i) are for employer matching contributions to each individual’s 401(k) defined contribution account under our company-wide 401(k) Pension and Profit-Sharing Plan. 33 Table of Contents Employment Contracts, Termination of Employment and Change-in-Control Arrangements On August 26, 2021, an employment agreement was executed between the Company and G. James Benoit, Jr., who was named as the Chief Executive Officer of the Company. Under the agreement, Mr. Benoit initially received a base salary of $60,000, which may be adjusted periodically by the board of directors, with eligibility to receive an annual performance bonus up to 100% of his base salary based on measurement standards to be determined by the Board’s compensation committee. Under the agreement, Mr. Benoit was granted options to purchase 3,000 shares of Company’s common stock under its 2016 Stock Incentive Plan and 100,000 options upon the adoption of its 2021 Stock Incentive Plan. The board of directors voted on March 18, 2022, with an effective date of the same, to increase Mr. Benoit’s base rate of pay by $107,500, and to further increase his base rate of pay by an additional $107,500 effective August 26, 2022, the anniversary date of his employment agreement. In the event of Mr. Benoit’s termination other than for Cause, death, disability, or by Mr. Benoit Without Good Reason (as defined in the agreement), he is entitled to receive pro-rated bonus, severance payments at the same rate as the base salary for a period of twelve months following the date of termination, and continued participation in all benefit plans for which he is legally eligible during the severance period. On March 22, 2022, an employment agreement was executed between the Company and Timothy G. Hannon, who was named as the Chief Financial Officer of the Company. Under the agreement, Mr. Hannon receives a base salary of $270,000, with eligibility to receive an annual performance bonus up to 50% of his base salary based on measurement standards to be determined by the Board’s compensation committee. In the event of Mr. Hannon’s termination other than for Cause, death, disability, or by Mr. Hannon Without Good Reason (as defined in the agreement), he is entitled to receive pro-rated bonus, severance payments at the same rate as the base salary for a period of twelve months following the date of termination, and the Company will pay for Mr. Hannon’s COBRA coverage during the severance period, if eligible. The following table sets forth the outstanding equity awards as of December 31, 2023 for the Named Executive Officers of the Company: Name (a) Number of securities underlying unexercised options (#) exercisable (b) Number of securities underlying unexercised options (#) unexercisable (c) Option exercise price ($) (e) Option expiration date (f) G. James Benoit Jr. 12,000 24,000 (1) $ 8.60 11/21/32 G. James Benoit Jr. - 3,000 (2) 28.00 08/26/26 G. James Benoit Jr. 100,000 - 48.90 12/30/26 G. James Benoit Jr. - 12,500 (3) 2.03 10/31/28 Timothy G. Hannon 1,333 2,667 (1) 8.60 11/21/32 Timothy G. Hannon 2,500 48.90 12/30/26 Timothy G. Hannon 7,500 15,000 (4) 49.90 03/22/32 Timothy G. Hannon - 12,500 (3) $ 2.03 10/31/28 (1) One half vest on each of November 21, 2024 and 2025. (2) Vests on August 26, 2024. (3) One-third vests on each of October 31, 2024, 2025, and 2026. (4) 7,500 shares vest on each of March 22, 2024 and 2025. Each Named Executive Officer is a salaried employee, without any guaranteed incentives. Bonuses and stock option awards are at the discretion of the Compensation Committee of the Board of Directors. Executive officers are eligible to participate in the WaveDancer 401(k) Pension and Profit-Sharing Plan under the same terms and matching percentages as other salaried employees. The Company has no outstanding stock awards to any executive officer. 34 Table of Contents Retirement Plans The Company has a Cash or Deferred Arrangement Agreement (CODA), which satisfies the requirements of section 401(k) of the Internal Revenue Code. This defined contribution retirement plan covers substantially all employees. Participants can elect to have up to the maximum percentage allowable of their salaries reduced and contributed to the plan. The Company may make matching contributions equal to a discretionary percentage of the participants’ elective deferrals. In 2023, the Company matched 25% of the first 6% of the participants’ elective deferrals. The Company may also make additional contributions to all eligible employees at its discretion. The Company did not make additional contributions during 2023. Compensation of Directors For the year ended December 31, 2023, the Company paid each non-employee director a quarterly fee of $3,750 per quarter to serve on the board and an additional $1,250 for non-employee committee chairpersons. Options to purchase shares of common stock may be issued in addition to the director’s annual fee. Expenses incurred in attending Board of Director meetings and committee meetings may be reimbursed. The following Table describes all compensation for each director for the year ended December 31, 2023. Name Fees earned or paid in cash ($) (b) Stock Awards ($) (c) Option Awards ($) (d) Non-equity incentive plan compensation ($) (e) Non- qualified deferred compensation ($) (f) All Other Compensation ($) (g) Total ($) (h) Paul B. Becker 1 $ 15,000 - $ 3,010 - - - $ 18,010 James C. DiPaula, Jr. 2 15,000 - 3,010 - - - 18,010 Jack L. Johnson, Jr. 3 20,000 - 3,010 - - - 23,010 William H. Pickle 4 15,000 - 3,010 - - - 18,010 Linda L. Singh 5 7,500 - - - - - 7,500 Donald J. Tringali 6 15,000 - - - - - 15,000 Bonnie K. Wachtel 7 $ 20,000 - $ 3,010 - - - $ 23,010 1 Had an aggregate amount of 11,000 options outstanding as of December 31, 2023. 2 Had an aggregate amount of 10,000 options outstanding as of December 31, 2023. 3 Had an aggregate amount of 12,000 options outstanding as of December 31, 2023. 4 Had an aggregate amount of 15,000 options outstanding as of December 31, 2023. 5 Had zero options outstanding as of December 31, 2023.Resigned as a director effective March 20, 2023. 6 Had zero options outstanding as of December 31, 2023. Resigned as a director effective July 5, 2023. 7 Had an aggregate amount of 14,000 options outstanding as of December 31, 2023. 35 Table of Contents Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Equity Compensation Plan Information The following table contains information regarding securities authorized and available for issuance under our equity compensation plans for certain employees, directors, and consultants, as of December 31, 2023. Number of securities to be issued upon exercise of outstanding options, warrants, and rights Weighted average exercise price of Outstanding options, warrants, and rights Number of securities remaining available for future issuance Equity compensation plans approved by security holders 1,2,3 391,000 $ 27.43 170,300 Equity compensation plans not approved by security holders - - - Total 391,000 $ 27.43 170,300 1 The Company’s 2021 Stock Incentive Plan was approved by the Company’s stockholders on December 2, 2021, has an effective date of October 11, 2021, and expires on October 11, 2031 (the “2021 Plan”). The 2021 Plan provides for the granting of equity awards to employees and directors. The maximum number of shares for which equity awards may be granted under the 2021 Plan is 500,000. Options granted under the 2021 Plan expire no later than ten years from the date of grant or 90 days after employment ceases, whichever comes first, and vest over periods determined by the Board of Directors 2 The Company’s 2016 Stock Incentive Plan was approved by the Company’s stockholders on June 1, 2016, has an effective date of April 4, 2016, and expires on April 4, 2026 (the “2016 Plan”). The 2016 Plan provides for the granting of equity awards to employees and directors. The maximum number of shares for which equity awards may be granted under the 2016 Plan is 1,00000. Options granted under the 2016 Plan expire no later than ten years from the date of grant or 90 days after employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. 3 The Company’s 2006 Stock Incentive Plan was approved by the Company’s shareholders on May 18, 2006, has an effective date of April 12, 2006, and expired April 12, 2016. The 2006 Plan provided for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards could be granted under the 2006 Plan was 195,000. Options under the 2006 Plan expire no later than ten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vested over periods determined by the Board of Directors. Security Ownership of Certain Beneficial Owners and Management Based on Schedule 13G, Schedule 13D, and Section 16(a) filings, there are no persons known to us as of the date of this filing to beneficially own more than 5% of the outstanding shares of our common stock. The following tables set forth the beneficial ownership of our common stock held as of February 29, 2024, by each current director, each Named Executive Officer; and by all current directors and executive officers as a group. Security Ownership of Management Name and Address of Beneficial Owner (1) Amount and Nature of Beneficial Ownership Percent Of Class(2) G. James Benoit, Jr., Chairman, Director, Chief Executive Officer 387,912 (3) 17.6% Timothy G. Hannon, Chief Financial Officer 18,833 (4) * Paul B. Becker, Director 5,500 (5) * James C. DiPaula, Jr., Director 60,966 (6) 3.0% Jack L. Johnson, Jr., Director 16,000 (7) * William H. Pickle, Director 33,641 (8) 1.7% Bonnie K. Wachtel, Director 40,880 (9) 2.0% All directors and executive officers as a group 563,732 24.8% * Beneficial Ownership represents less than 1% of the class of shares. (1) The address of record for all directors and executive officers is care of the Company at 12015 Lee Jackson Memorial Hwy, Ste 210, Fairfax VA 22033. (2) The foregoing percentages are based on the number of shares of our common stock outstanding as of February 29, 2024, of 2,013,180, and for each beneficial owner and all directors and officers as a group includes all options and warrants exercisable within 60 days of February 29, 2024. (3) Includes 112,000 shares issuable upon the exercise of options and 77,333 shares issuable upon the exercise of warrants to purchase common stock. (4) Includes 18,833 shares issuable upon the exercise of options. (5) Includes 5,500 shares issuable upon the exercise of options. (6) Includes 5,000 shares issuable upon the exercise of options and 5,856 shares issuable upon the exercise of warrants to purchase common stock. (7) Includes 7,000 shares issuable upon the exercise of options and 3,500 shares issuable upon the exercise of warrants to purchase common stock. (8) Includes 9,500 shares issuable upon the exercise of options and 6,829 shares issuable upon the exercise of warrants to purchase common stock. (9) Includes 8,500 shares issuable upon the exercise of options and 2,500 shares issuable upon the exercise of warrants to purchase common stock. 36 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director Independence Transactions with Related Persons A "Related Party Transaction" is any transaction directly or indirectly involving any related party that would need to be disclosed under Item 404(a) of Regulation S-K. The Company has determined as a policy that any Related Party Transaction requires the approval of the Board of Directors. On September 27, 2023, the Company sold 35,000 shares of common stock to G. James Benoit, Jr., Chairman and Chief Executive Officer at a price of $5.00 per share in a private placement offering from which it raised aggregate gross proceeds of $175,000. During the fiscal year ending December 31, 2023, the Company did not engage in any additional Related Party Transactions. Independence Our Board has determined that the following members of the Board qualify as independent under the definition promulgated by the NASDAQ Stock Market: Paul B. Becker James C. DiPaula, Jr. Jack L. Johnson, Jr. William H. Pickle Bonnie K. Wachtel There are no family relationships between any directors or executive officers of the Company. Item 14. Principal Accountant Fees and Services ( CohnReznick LLP , Tysons, Virginia , PCAOB ID 596 ) The following table presents fees for professional audit services rendered by CohnReznick LLP for the audits of the Company's annual financial statements for the years ended December 31, 2023 and 2022, respectively, and fees billed for other services rendered by our principal accountants during those periods. Fee Category 2023 Fees 2022 Fees Audit Fees $ 383,829 $ 313,400 Tax Fees 38,587 61,018 Total Fees and Services $ 422,416 $ 374,418 Audit Fees consist of fees for professional services rendered for the audit of the Company’s annual financial statements and for the review of the Company’s financial statements included in its quarterly reports on Form 10‑Q. Tax Fees consist of fees related to tax compliance, tax advice and tax planning services. Policy on Audit Committee Pre-Approval In accordance with its written charter, our Audit Committee pre-approves all audit and permissible non-audit services, including the scope of contemplated services and the related fees, that are to be performed by CohnReznick LLP, our independent registered public accounting firm, subject to the de minimis exceptions described in Section 10A(i)(1)(B) of the Exchange Act, which are approved by the Audit Committee prior to the completion of the audit. The Audit Committee's pre-approval of non-audit services involves consideration of the impact of providing such services on CohnReznick LLP's independence. All 2023 and 2022 non-audit services were pre-approved by the Audit Committee. 37 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules The following is an explanation of documents filed as part of this report: ● Financial Statements . Reference is made to the Index to Consolidated Financial Statements on page F-1, where these documents are listed. ● Financial Statement Schedules . Financial statement schedules have been omitted because the required information is not applicable, or not present in amounts sufficient to require submission of the schedules, or because the information is included in the financial statements or notes thereto. ● Exhibits . A list of exhibits required to be filed as a part of this Annual Report on Form 10-K is set forth in the Exhibit Index, which is presented elsewhere in this document and incorporated herein by reference. Item 16. Form 10-K Summary None. 38 Table of Contents WAVEDANCER, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM) Years Ended December 31, 2023 and 2022 Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 596) F-2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F-4 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-7 Notes to Consolidated Financial Statements F-8 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of WaveDancer, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of WaveDancer, Inc. (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the financial statements, the entity has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Discontinued Operations (Notes 1, 2 and 6 to the Financial Statements) Critical Audit Matter On March 17, 2023, the Company entered into and completed the sale of all of the shares of Gray Matters, Inc. (“GMI”) to Gray Matters Data Corporation (“GMDC”). The Company received cash and common stock in GMDC as consideration, along with contingent payments to be received. GMI represented all of the operations of the Company’s Blockchain SCM segment and as such management determined that the sale met the criteria to be classified and presented as discontinued operations for all periods presented in accordance with Accounting Standard Codification 205-20, Discontinued Operations (“ASC 205-20”). Significant judgment is exercised by the Company in the identification, segregation, and presentation and disclosure of discontinued operations related to the sale of GMI. Given these factors, the related audit effort in evaluating management’s judgments in determining the matter was challenging, subjective, and complex and required a high degree of auditor judgment. F-2 Table of Contents How our audit addressed the Critical Audit Matter Our principal audit procedures related to the Company’s determination of discontinued operations for the Gray Matters reporting unit included the following: ● We gained an understanding of and evaluated the design and implementation of the Company’s controls that address the risk of material misstatement related to the Company's discontinued operations assessment process. ● We obtained and evaluated the Company's memorandum that documented management's presentation and disclosure conclusions with respect to the relevant accounting standards. ● We tested the classification of amounts included in discontinued operations by agreeing such amounts to the Company's historical accounting records. ● With the assistance of our firm’s valuation professionals with specialized skills and knowledge, we tested the Company’s discounted cash flow models, including certain assumptions such as the discount rates and terminal value as well as the estimates of the fair value of rollover equity and contingent payments to be received from the buyers of GMI in the first quarter of 2023. We have served as the Company’s auditor since 2012. /s/CohnReznick LLP Tysons, Virginia March 20, 2024 F-3 Table of Contents WAVEDANCER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 ASSETS Current assets Cash and cash equivalents $ 681,995 $ 731,081 Accounts receivable 1,117,862 1,629,559 Prepaid expenses and other current assets 267,351 442,445 Total current assets 2,067,208 2,803,085 Intangible assets, net of accumulated amortization of $ 484,461 and $ 308,217 , respectively 1,005,539 1,181,783 Goodwill 1,125,101 1,125,101 Right-of-use operating lease asset 245,569 376,104 Property and equipment, net of accumulated depreciation and amortization of $ 432,620 and $ 391,628 , respectively 57,999 98,991 Other assets 18,419 79,305 Assets held for sale - 2,316,845 Total assets $ 4,519,835 $ 7,981,214 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 403,441 $ 573,789 Revolving line of credit 500,000 425,000 Accrued payroll and related liabilities 615,766 676,796 Commissions payable 30,223 125,033 Income taxes payable 3,450 3,101 Other accrued liabilities 267,604 283,497 Contract liabilities 114,540 182,756 Operating lease liabilities - current 163,282 203,342 Deferred acquisition consideration - 1,415,098 Total current liabilities 2,098,306 3,888,412 Operating lease liabilities - non-current 136,652 303,778 Deferred tax liabilities, net 16,187 59,121 Total liabilities 2,251,145 4,251,311 Stockholders' equity Common stock, $ 0.001 par value 100,000,000 shares authorized; 2,180,485 and 2,083,860 shares issued, 2,013,180 and 1,916,555 shares outstanding as of December 31, 2023 and 2022, respectively 2,180 2,084 Additional paid-in capital 36,456,957 35,883,831 Accumulated deficit ( 33,225,236 ) ( 31,190,801 ) Treasury stock, 167,305 shares at cost, as of December 31, 2023 and 2022 ( 965,211 ) ( 965,211 ) Total stockholders' equity 2,268,690 3,729,903 Total liabilities and stockholders' equity $ 4,519,835 $ 7,981,214 The accompanying notes are an integral part of the consolidated financial statements. F-4 Table of Contents WAVEDANCER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2023 2022 Revenues Professional fees $ 7,793,163 $ 8,347,052 Software sales 188,812 2,675,930 Total revenues 7,981,975 11,022,982 Cost of revenues Cost of professional fees 5,180,508 5,651,424 Cost of software sales 187,170 2,508,714 Total cost of revenues excluding depreciation and amortization 5,367,678 8,160,138 Gross profit 2,614,297 2,862,844 Selling, general and administrative expenses 5,842,132 8,281,801 Gain on litigation settlement ( 1,442,468 ) - Operating loss from continuing operations ( 1,785,367 ) ( 5,418,957 ) Gain on sale of equity investment and settlement of contingent consideration receivable 382,525 - Other income, net 10,596 7,107 Interest expense ( 103,256 ) ( 81,621 ) Loss from continuing operations before income taxes and equity in net loss of affiliate ( 1,495,502 ) ( 5,493,471 ) Income tax (benefit) expense ( 42,585 ) 812,457 Net loss from continuing operations before equity in net loss of affiliate ( 1,452,917 ) ( 6,305,928 ) Equity in net loss of affiliate ( 245,525 ) - Net loss from continuing operations ( 1,698,442 ) ( 6,305,928 ) Loss from discontinued operations ( 335,993 ) ( 11,447,910 ) Net loss $ ( 2,034,435 ) $ ( 17,753,838 ) Basic and diluted loss per share from continuing operations $ ( 0.87 ) $ ( 3.56 ) Basic and diluted loss per share from discontinued operations ( 0.17 ) ( 6.47 ) Basic and diluted net loss per share $ ( 1.04 ) $ ( 10.03 ) Weighted average common shares outstanding Basic and diluted 1,948,769 1,768,853 The accompanying notes are an integral part of the consolidated financial statements. F-5 Table of Contents WAVEDANCER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY Shares of Common Additional Stock Common Paid-In Accumulated Treasury Issued Stock Capital Deficit Stock Total Balances at December 31, 2021 1,888,231 $ 1,888 $ 31,806,458 $ ( 13,436,963 ) $ ( 930,211 ) $ 17,441,172 Net loss - - - ( 17,753,838 ) - ( 17,753,838 ) Stock option compensation - - 1,967,927 - - 1,967,927 Stock issued 169,229 169 2,036,831 - - 2,037,000 Issuance of stock from exercise of options 26,400 27 72,615 - ( 35,000 ) 37,642 Balances at December 31, 2022 2,083,860 2,084 35,883,831 ( 31,190,801 ) ( 965,211 ) 3,729,903 Net loss - - - ( 2,034,435 ) - ( 2,034,435 ) Stock option compensation - - 776,036 - - 776,036 Forfeiture of stock options on disposal of business (Note 2) - - ( 407,322 ) - - ( 407,322 ) Stock issued 94,625 94 347,014 - - 347,108 Issuance of stock from exercise of options 2,000 2 7,398 - - 7,400 Amortization of stock issue costs - - ( 150,000 ) - - ( 150,000 ) Balances at December 31, 2023 2,180,485 $ 2,180 $ 36,456,957 $ ( 33,225,236 ) $ ( 965,211 ) $ 2,268,690 The accompanying notes are an integral part of the consolidated financial statements. F-6 Table of Contents WAVEDANCER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2023 2022 Cash flows from operating activities Net loss $ ( 2,034,435 ) $ ( 17,753,838 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations 335,993 11,447,910 Depreciation and amortization 217,236 219,986 Stock-based compensation 710,550 1,276,455 Deferred income tax expense ( 42,934 ) ( 3,019,124 ) Amortization of right-of-use assets 130,535 183,070 Accretion of deferred acquisition consideration 27,370 80,098 Gain on litigation settlement ( 1,442,468 ) - Gain on sale of equity investment and settlement of contingent consideration receivable ( 382,525 ) - Equity in loss of affiliate 245,525 - Changes in operating assets and liabilities: Accounts receivable 511,697 35,303 Prepaid expenses and other current assets 158,242 ( 15,455 ) Other assets 60,886 ( 2,205 ) Accounts payable ( 170,348 ) ( 76,710 ) Contract liabilities ( 68,216 ) ( 4,079 ) Accrued payroll and related liabilities and other accrued liabilities ( 76,574 ) 235,259 Operating lease liability ( 207,186 ) ( 192,128 ) Commissions payable ( 94,810 ) ( 99,217 ) Cash used in operating activities of continuing operations ( 2,121,462 ) ( 7,684,675 ) Cash used in operating activities of discontinued operations ( 693,106 ) 1,670,714 Net cash used in operating activities ( 2,814,568 ) ( 6,013,961 ) Cash flows from investing activities Acquisition of property and equipment - ( 535,902 ) Proceeds from sale of equity investment and settlement of contingent consideration receivable 1,400,000 - Proceeds from disposal of business 935,974 - Net cash provided by (used in) investing activities 2,335,974 ( 535,902 ) Cash flows from financing activities Borrowings under revolving line of credit 575,000 425,000 Repayments under revolving line of credit ( 500,000 ) - Premium financing borrowings 305,759 - Premium financing repayments ( 305,759 ) - Proceeds from issuance of stock 347,108 1,887,000 Proceeds from exercise of stock options 7,400 37,642 Net cash provided by financing activities 429,508 2,349,642 Net decrease in cash and cash equivalents ( 49,086 ) ( 4,200,221 ) Cash and cash equivalents, beginning of period 731,081 4,931,302 Cash and cash equivalents, end of period $ 681,995 $ 731,081 Supplemental cash flow Information Interest paid $ 73,678 $ 1,250 Non-cash investing and financing activities: Non-cash proceeds on disposal of business $ 1,263,000 $ - Value of common stock issued in connection with common stock purchase agreement $ - $ 150,000 The accompanying notes are an integral part of the consolidated financial statements. F-7 Table of Contents WAVEDANCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Organization and Business Founded in 1979 as Information Analysis Incorporated (“IAI”), IAI changed its name to WaveDancer, Inc. (“WaveDancer” or the “Company”) 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”). 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 these Notes to Condensed Consolidated Financial Statements for 2023 and 2022 relate to the Company’s continuing operations, except Note 2, which relates to the discontinue operations and corresponding assets and liabilities held for sale of GMI. See Note 2 for further information about the sale transaction of GMI, the deconsolidation of GMI, and treatment of GMI as a discontinued operation. Prior to March 17, 2023, we had two operating segments: Tellenger, the business unit that comprises all of our current products and services, and Blockchain SCM. Given the classification of GMI, which comprised all of the material operations of the Blockchain SCM segment, as a discontinued operation (see Note 2 ) as of March 17, 2023, the Company manages its business as one reportable operating segment. Liquidity and Going Concern During the year ended December 31, 2023, the Company used cash from operations, excluding discontinued operations, of $ 2,121,462 and as of December 31, 2023, had a net working capital deficit of $ 31,098 , including cash and cash equivalents of $ 681,995 . As of December 31, 2023, the Company had no borrowing availability under its bank line of credit. On November 15, 2023, the Company and its wholly owned subsidiary, FFN, Inc.(“FFN”), entered into an Agreement and Plan of Merger (“Merger Agreement”) with Firefly Neuroscience, Inc. (“Firefly”). FFN was incorporated solely for the purpose of entering into the Merger Agreement. In accordance with the Merger Agreement, FFN will merge into Firefly which will become a wholly owned subsidiary of WaveDancer, WaveDancer will change its name to Firefly Neuroscience, Inc., and the Firefly shares will be converted into WaveDancer shares (the “Merger”). The board of directors of Firefly after the Merger will consist of five members, one of whom will be designated by WaveDancer. As a condition of the Merger Agreement, on November 15, 2023, the Company also entered into a Stock Purchase Agreement with Wavetop Solutions, Inc.(“Wavetop”), a company owned and controlled by WaveDancer's chairman and chief executive officer, to sell all of the outstanding shares of Tellenger, Inc. to Wavetop for $ 1.5 million of cash. Tellenger is the entity through which the Company operates its day-to-day business. On March 14, 2024, the Company convened a special meeting of its shareholders and received the shareholder approvals required to close the Merger. Firefly has obtained the necessary consent from its shareholders for the Merger. The Merger Agreement requires that WaveDancer has sufficient cash on hand on the closing date to pay all its outstanding liabilities on that date including transactions fees and expenses as well as severance costs for employees that will be terminated as a result of the merger. The Company will have to raise approximately $ 0.8 to $ 1.1 million to satisfy its obligations on the closing date. In addition, Firefly has conditions it must satisfy in order for the Merger to close, including approval by Nasdaq Capital Markets LLC of its initial listing application. In order to have its listing application approved by Nasdaq, Firefly will need to raise approximately $ 6 million of equity as of the closing of the Merger. There is no assurance that the Company will successfully raise the capital it needs to close the Merger with Firefly, nor that all the other conditions precedent to the Merger closing will be satisfied, 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 consolidated financial statements are issued. If the Merger does not close, the Company will need to raise additional capital and reduce its operating expenses to meet its ongoing cash flow requirements and there is no assurance that such efforts would be successful. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Reverse Stock Split On October 18, 2023, the Company effected a reverse stock split of its common stock, par value $ 0.001 per share, (the “Common Stock”) at a ratio of one -for- ten (the “Reverse Stock Split”). The Reverse Stock split affected all issued common stock and options and warrants to acquire common stock. No fractional shares were issued as a result of the reverse split and any fractional share otherwise issuable were rounded up to the nearest whole number. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split. Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834 pre-split shares to 2,013,180 post-split shares, after finalizing the rounding of fractional shares. As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten. Basis of Presentation and Consolidation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding annual financial reporting. The accompanying consolidated financial statements include the accounts of WaveDancer, Inc. and its consolidated subsidiaries (collectively, the “Company”, “we” or “our”). All significant intercompany balances and transactions have been eliminated in consolidation. F- 8 Table of Contents Use of Estimates Preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; fair values of financial instruments, reporting units, intangible assets, and goodwill; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, the valuation of deferred tax assets and liabilities; and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, and the results of which form the basis for making judgments about the carrying values of assets and liabilities. Revenue Recognition See Note 3 for a detailed description of our revenue recognition policy. Cash and Cash Equivalents We consider all highly liquid investments with maturities of ninety days or less at the time of purchase to be cash equivalents. Deposits are maintained with a federally insured bank. Balances at times exceed federally insured limits, but management does not consider this to be a significant concentration of credit risk. Accounts Receivable Our payment terms for accounts receivable vary by the types of our customers and the products or services offered. Typically, we invoice for services on a monthly basis, and we invoice for product sales upon delivery. We maintain an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable, and changes in such are classified as general and administrative expense in the consolidated statements of operations. We assess collectability on an individual customer basis. In determining the amount of the allowance for credit losses, we consider historical collectability based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. Our allowance for doubtful accounts as of December 31, 2023 and 2022 was immaterial. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over the lesser of the useful life or five years, purchased software is depreciated over the lesser of three years or the term of the license, and computer equipment is depreciated over three years. Leasehold improvements are amortized over the estimated term of the lease or the estimated life of the improvement, whichever is shorter. Maintenance and minor repairs are charged to operations as incurred. Gains and losses on dispositions are recorded in operations. See Note 7. Stock-Based Compensation The Company’s stock-based compensation plans as of December 31, 2023 are described in Note 13 below. Total compensation expense related to these plans was $ 710,550 and $ 1,276,455 for the years ended December 31, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the consolidated statements of operations. Stock-based compensation expense for discontinued operations, excluding the effect of option forfeitures, was $ 65,487 and $ 691,472 for the years ended December 31, 2023 and 2022, respectively. The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense. When stock-based compensation is awarded, the expense is recognized ratably over the requisite service period. The Company recognizes forfeitures at the time the forfeiture occurs. Equity Method Investments The Company accounts for investments in which it owns between 20% to 50% of the common stock or has the ability to exercise significant influence, but not control, over the investee using the equity method of accounting in accordance with ASC 323 - Equity Method Investments and Joint Ventures (“ASC 323” ). Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The Company reflects its share of gains and losses from the investment in equity in net loss of affiliate in the consolidated statements of operations using the most recently available earnings data at the end of the period. In connection with the sale of GMI to GMDC on March 17, 2023, ( the "Sale Date"), the Company received common stock in GMDC representing approximately 24.9 % of the equity of GMDC. On August 9, 2023 the Company sold all of its GMDC common stock. During the period from March 18 through August 9, 2023, the Company accounted for its investment in GMDC in accordance with the equity method and, during that period, recognized $ 245,525 as its share of GMDC’s net loss. See Note 2 for information about the GMI sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation. Income Taxes Deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. The Company expects that recent tax law changes contained in the Inflation Reduction Act and CHIPS Act will not have a material impact on its provision for income taxes. In addition, a valuation allowance is required to be recognized if it is believed more likely than not that a deferred tax asset will not be fully realized. Authoritative guidance prescribes a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements. The Company continually reviews tax laws, regulations and related guidance in order to properly record any uncertain tax liabilities. See Note 11. Loss Per Share The Company’s loss per share calculation is based upon the weighted average number of shares of common stock outstanding. The dilutive effect of stock options, warrants, and other equity instruments are included for purposes of calculating diluted income per share, except for periods when the Company reports a net loss, in which case the inclusion of such equity instruments would be antidilutive. See Note 16. F- 9 Table of Contents Concentration of Credit Risk During the year ended December 31, 2023, the Company’s prime contracts with U.S. government agencies represented 8.8 % of revenue and subcontracts under federal procurements represented 89.7 % of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 29.9 %, 20.5 % and 17.7 % of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 55.4 % of the Company’s revenue in aggregate. During the year ended December 31, 2022, the Company’s prime contracts with U.S. government agencies represented 25.1 % of revenue and subcontracts under federal procurements represented 71.3 % of revenue. The terms of these contracts and subcontracts vary from single transactions to five years. Three subcontracts under federal procurements represented 28.4 %, 17.2 % and 11.2 % of revenue, respectively. Revenue from one prime contractor under which the Company has multiple subcontracts represented 43.6 % of the Company’s revenue in aggregate. The Company sold third -party software and maintenance contracts under agreements with one major supplier in 2023 and 2022, accounting for 2.4 % and 24.3 % of total revenue, respectively. As of December 31, 2023, the Company’s accounts receivable included receivables from two subcontracts under federal procurements that represented 30.2 % and 29.3 % of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts represented 70.1 % of the Company’s outstanding accounts receivable in aggregate. As of December 31, 2022, the Company’s accounts receivable included receivables from one prime contract and one subcontract under federal procurements that represented 26.5 % and 25.8 % of the Company’s outstanding accounts receivable, respectively. Receivables from one prime contractor under which the Company has multiple subcontracts represented 39.2 % of the Company’s outstanding accounts receivable in aggregate. Intangibles and Goodwill The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Goodwill – Intangibles and Other (“ASC 350” ) and has concluded that it has one operating segment and one reporting unit for purposes of goodwill impairment testing. 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. 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. Recently Issued Accounting Pronouncements In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023 - 07 are also required for public entities with a single reportable segment. The ASU is effective for the Company’s Annual Report on Form 10 -K for the fiscal year ended December 31, 2024, and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures and expects that it will result in additional disclosures. F- 10 Table of Contents Note 2. Sale and Deconsolidation of GMI and Discontinued Operations On March 17, 2023, the Company entered into and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC ("StealthPoint"), a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc. In exchange for this sale, the Company received common shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred stock referenced below, 24.9 % interest in the purchaser, cash consideration of $ 935,974 and contingent annual payments equal to five percent ( 5 %) of the purchaser’s GAAP based revenue through December 31, 2029 attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. GMDC also paid the Company $ 133,148 for certain of GMI’s operating expenses for the period beginning March 1, 2023 through March 17, 2023. The equity interest StealthPoint and other GMDC investors received was in the form of Series A non-participating convertible preferred stock having a one -times ( 1x ) liquidation preference and no cumulative dividends. In addition, the Company and GMDC entered into a transition services agreement whereby the Company continued to provide certain administrative services for GMI. The value of these services was determined to be $ 65,000 which was paid by GMDC at closing and was not subject to adjustment. The $ 65,000 prepayment was recognized as a reduction to selling, general and administrative expenses ratably over the three -month period ended June 30, 2023 after which time no further transition services were provided. The total cash received at closing was $ 1,000,974 . The Company also had the right to appoint a representative to GMDC’s board of directors and a right to co-invest in future GMDC preferred stock financing rounds. The Company recognized a gain on the sale of GMI of $ 100,615 in 2023, which is included in net loss on discontinued operations in the condensed consolidated statement of operations. We deconsolidated GMI immediately upon its sale. GMDC was not a related party of the Company at the time of its purchase of GMI. Subsequent to our deconsolidation of GMI, and until our sale of GMDC common stock on August 9, 2023, GMI and GMDC were related parties of the Company due to our equity interest in GMDC. The components of the consideration received and the methods for determining their fair values as of March 17, 2023 were as follows: Consideration Amount Description and Valuation Methodology Cash at closing $ 935,974 Cash received at closing less estimated value of transition services to be provided. Cash after closing 133,148 Actual cash operating expenses of GMI from March 1 through March 17, 2023 (prior to the transfer of GMI to GMDC). GMDC common stock 581,000 Based on Series A preferred stock issuance to other GMDC investors for $ 3,000,000 in cash and application of an option pricing model backsolve method and a minority interest discount to estimate the fair value of the common shares of GMDC. Contingent payments 682,000 Estimated by applying a discount rate of 40.8 % to the projected cash receipts expected over the 7 -year horizon. Total consideration $ 2,332,122 The GMDC common stock was accounted for as an equity method investment from March 17, 2023, and through its sale on August 9, 2023. During this period, a net loss of $ 245,525 in the equity investment was recorded. 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 . The contingent consideration receivable of $ 682,000 was settled in cash for $ 1,000,000 and a gain of $ 318,000 was recognized in the third quarter of 2023. The following table sets forth details of net earnings from discontinued operations for the years ended December 31, 2023 and 2022, which reflects the results of our former Blockchain SCM operating segment through the date our controlling financial interest in it was sold – March 17, 2023. 2023 2022 Revenue $ - $ 998,970 Cost of revenue 74,223 1,281,656 Excess of contract costs over revenue ( 74,223 ) ( 282,686 ) Operating expenses - Salaries and benefits 484,249 1,337,788 Intangibles amortization 85,338 1,223,328 Stock based compensation, before forfeitures 65,487 691,472 Forfeiture of stock options ( 407,322 ) - Other operating expenses 134,633 530,294 Change in fair value of contingent consideration - ( 930,000 ) Impairment of long-lived assets - 3,762,915 Goodwill impairment - 6,460,168 Gain on disposal of business ( 100,615 ) - Loss before income tax benefit ( 335,993 ) ( 13,358,651 ) Income tax benefit - 1,910,741 Net loss on discontinued operations $ ( 335,993 ) $ ( 11,447,910 ) During the year ended December 31, 2023, there was a total of 715,000 unvested stock options forfeited by GMI employees, including 527,500 forfeited by employees who resigned from WaveDancer, on the Sale Date, and were offered employment by GMDC. Stock-based compensation expense of $ 407,322 , previously recognized for these forfeited options, was taken back into income in 2023. The income tax benefit is at an effective rate different from the federal statutory rate due principally to the following: 2023 2022 Loss from discontinued operations before income tax benefit $ ( 335,993 ) $ ( 13,358,651 ) Income tax benefit at federal statutory rate 70,559 2,805,317 State income tax benefit, net of federal benefit - 392,699 Permanent Differences - ( 1,158,687 ) Net Operating Loss ("NOL") expirations ( 7,084 ) - Other ( 47,203 ) ( 11,675 ) Change in federal valuation allowance ( 16,272 ) ( 116,913 ) Income tax benefit - 1,910,741 F- 11 Table of Contents The following table presents the components of the assets of our discontinued operations that are classified as held for sale as of December 31, 2022. As of December 31, 2023, GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet. December 31, 2022 Customer relationship intangible asset, net of amortization $ 1,057,722 Technology intangible asset, net of amortization 760,698 Capitalized software development costs 498,425 Total assets of discontinued operations $ 2,316,845 Note 3. Revenue from Contracts with Customers Revenue is recognized when all the following steps have been taken and criteria met for each contract: ● Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform and, (iii) it determines that collection of substantially all consideration to which the Company will be entitled in exchange for goods or services that will be transferred is probable based on the customer’s intent and ability to pay the promised consideration. ● Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. ● Determination of the transaction price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. The Company typically estimates the transaction price impact of discounts offered to the customers for early payments on receivables or rebates based on sales target achievements. Constraints are applied when estimating variable considerations based on historical experience where applicable. ● Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price by considering available information such as historical selling prices of the performance obligation, geographic location, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations. ● Recognition of revenue when, or as, the Company satisfies performance obligations - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Nature of Products and Services We generate revenue from the sales of information technology professional services, sales of third -party software licenses and implementation and training services, sales of third -party support and maintenance contracts based on those software products, and incentive payments received from third -party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. We sell through our direct relationships with end customers and under subcontractor arrangements. Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units has occurred and units are accepted by the customer or are reasonably expected to be accepted. Generally, revenue under fixed-price arrangements and mixed arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer. For fixed-price arrangements under which documentary evidence of acceptance or receipt of deliverables is not present or withheld by the customer, the Company recognizes revenue when it has the right to invoice the customer. For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time. Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses. The Company’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. Revenue for bulk desktop software licenses for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. For desktop software licenses sold on an individual license basis to non-government customers, where the Company has no obligation to the customer after the third -party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs. F- 12 Table of Contents Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support. Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received. Disaggregation of Revenue from Contracts with Customers Year Ended December 31, 2023 2022 Contract Type Amount Percentage Amount Percentage Services time & materials $ 6,923,176 86.7 % $ 7,521,165 68.2 % Services fixed price over time 414,682 5.2 % 407,611 3.7 % Services combination 131,190 1.6 % 113,610 1.0 % Services fixed price per unit 324,115 4.1 % 304,666 2.8 % Third-party software 188,812 2.4 % 2,427,937 22.0 % Software support & maintenance - 0.0 % 142,891 1.3 % Incentive payments - 0.0 % 105,102 1.0 % Total revenue $ 7,981,975 100.0 % $ 11,022,982 100.0 % Contract Balances Contract Liabilities Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Changes in contract liabilities balances in 2023 and 2022 are as follows: Balance at December 31, 2021 $ 186,835 Contract liabilities added 439,230 Revenue recognized ( 443,309 ) Balance at December 31, 2022 182,756 Contract liabilities added 118,018 Revenue recognized ( 186,234 ) Balance at December 31, 2023 $ 114,540 Revenue recognized during 2023 from the balance as of December 31, 2022 was $ 159,307 and revenue recognized during 2022 from the balance as of December 31, 2021 was $ 160,809 . Costs to Obtain or Fulfill a Contract When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it would not have incurred those costs if the contract had not been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There were no such assets as of December 31, 2023, and 2022. When incurred, these costs are amortized ratably over the expected life of the customer. Deferred Costs of Revenue Deferred costs of revenue consist of the costs of third -party support and maintenance contracts for enterprise server-based software, as well direct costs associated with contract deliverables for which control of the work product has not passed to the customer and contract revenue has not been recognized. These costs are reported under the prepaid expenses and other current assets caption on the Company’s consolidated balance sheets. The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue. Changes in deferred costs of revenue balances during 2023 and 2022 are as follows: Balance at December 31, 2021 $ 154,218 Deferred costs added 223,148 Deferred costs expensed ( 220,647 ) Balance at December 31, 2022 156,719 Deferred costs added 100,098 Deferred costs expensed ( 168,829 ) Balance at December 31, 2023 $ 87,988 F- 13 Table of Contents Note 4. Leases The Company has two significant operating leases, one for its headquarters offices in Fairfax, Virginia and one for additional office space in Annapolis, Maryland. The leases both commenced in 2021 and have original lease terms ranging from 37 to 67 months and rental rates escalate by approximately 2.5 % annually under both leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company’s consolidated balance sheets as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, the Company does not have any sales-type or direct financing leases. The Company’s operating lease asset represents its right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreement includes rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liability and operating lease asset. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants. The Company does not sublease any real estate to third parties. As of December 31, 2023, our two operating leases had a weighted average remaining lease term of 25 months and a weighted average discount rate of 5.1 %. Future lease payments under operating leases as of December 31, 2023 were as follows: 2024 $ 174,721 2025 74,804 2026 70,220 Total lease payments 319,745 Less: discount ( 19,811 ) Present value of lease liabilities $ 299,934 The total expense incurred related to its operating leases was $ 152,211 and $ 214,241 for the years ended December 31, 2023 and 2022, respectively, and is included in selling, general and administrative expenses on the consolidated statements of operations. Note 5. Receivables Accounts receivable as of December 31, 2023 and 2022, consist of the following: December 31, 2023 December 31, 2022 Billed federal government $ 1,110,001 $ 1,573,407 Billed commercial and local government 6,600 56,152 Unbilled receivables 1,261 - Accounts receivable $ 1,117,862 $ 1,629,559 Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer. Unbilled receivables include short-term contract assets where billing cycles differ from calendar months, or a monthly fixed billing amount does not reflect the revenue earned in a given month. The accounts receivable balance as of December 31, 2021, was $ 1,664,862 . F- 14 Table of Contents Note 6. Fair Value Measurements The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: • Level 1—Quoted prices in active markets for identical assets or liabilities; • Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following table represents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2023 and 2022: December 31, 2023 Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 631,258 $ - $ - $ 631,258 December 31, 2022 Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 58,242 $ - $ - $ 58,242 The following table reflects the change in fair value of our financial instruments measured at fair value on a recurring basis based on Level 3 inputs: Fair value of contingent consideration: December 31, 2021 $ 930,000 Additions - Changes in Fair Value ( 930,000 ) December 31, 2022 - Additions 682,000 Changes in Fair Value - Settlements ( 682,000 ) December 31, 2023 $ - Money market funds are highly liquid investments and are included in cash and cash equivalents on the consolidated balance sheets. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. See Note 2 for a discussion of the fair value of contingent consideration. The carrying amounts of financial instruments such as accounts receivable and accounts payable approximate the related fair value due to the short-term maturities of these instruments. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis There were no gains or losses on assets measured at fair value on a nonrecurring basis in 2023. The following table is a summary of losses on assets measured at fair value on a nonrecurring basis in 2022, which are included in loss from discontinued operations on the consolidated statement of operations: 2022 Impairment of long-lived assets Intangible assets $ 3,649,193 Right of use assets 113,722 3,762,915 Impairment of goodwill 6,460,168 Total $ 10,223,083 F- 15 Table of Contents During the third quarter of 2022, our Gray Matters reporting unit, which was the same as our former Blockchain SCM operating segment, 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. Accordingly, we performed an interim goodwill impairment test 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. 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. For our third quarter 2022 interim goodwill impairment testing, the fair value of the reporting unit was determined using an income approach based on a discounted cash flow (“DCF”) model which requires a complex series of judgments about future events and uncertainties and relies heavily on estimates of expected cash flows, an appropriate discount rate, and a terminal growth rate. Any changes in key assumptions, including failure to grow the revenue and improve the profitability of GMI, or other unanticipated events and circumstances, may affect such estimates. Fair value assessments of the reporting unit are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. The discount rate and terminal growth rate used in our 2022 third quarter interim impairment test for the Gray Matters reporting unit were 22.5 % and 3.0 %, respectively. On January 18, 2023 we executed a non-binding letter of intent to sell of the shares of GMI to an affiliate of the venture capital firm StealthPoint LLC (“SP”). While the Company continued to believe in the long-term commercial viability of its Blockchain SCM product, we also believed that GMI would continue to incur losses for a longer period than was originally estimated and would require additional cash investment before it could generate positive cash flow. As of December 31, 2022, we determined that the ongoing discussions with SP and negotiations of potential value of our Gray Matters reporting unit were considered trigger events for purposes of evaluating the recoverability of that reporting unit and its associated goodwill. The components of the consideration and methods for valuing them to determine the fair value of the Gray Matters reporting unit were as follows: Consideration Amount Description and Valuation Methodology Cash at closing $ 935,974 Cash received at closing less estimated value of transition services to be provided. Cash after closing 133,148 Actual cash operating expenses of GMI from March 1 through March 17, 2023 (prior to the transfer of GMI to GMDC). GMDC common stock 581,000 Based on Series A preferred stock issuance to other GMDC investors for $ 3,000,000 in cash and application of an option pricing model backsolve method and a minority interest discount to estimate the fair value of the common shares of GMDC. Contingent payments 682,000 Estimated by applying a discount rate of 40.8% to the projected cash receipts expected over the 7 -year horizon. (See Note 5). Total consideration $ 2,332,122 As a result of the December 31, 2022 impairment testing of the GMI reporting unit, we recorded a non-cash pre-tax charge for impairment of definite lived intangible assets of $ 3,649,193 , which resulted in a deferred tax benefit of $ 910,147 and a non-cash pre-tax and after-tax charge of $ 4,205,544 to impair the remaining balance of goodwill, bringing the total goodwill impairment to $ 6,460,168 for 2022. We also recorded a non-cash pre-tax impairment charge of right of use assets of $ 113,722 which resulted in a deferred tax benefit of $ 16,116 . The Company consummated the transaction with StealthPoint on March 17, 2023, and immediately deconsolidated GMI. See Note 2. Note 7. Property and Equipment Property and equipment consist of the following as of December 31: 2023 2022 Computer equipment and purchased software $ 365,874 $ 365,874 Furniture and equipment 117,307 117,307 Leasehold improvements 7,438 7,438 Property and equipment, gross 490,619 490,619 Less: Accumulated depreciation ( 432,620 ) ( 391,628 ) Property and equipment, net $ 57,999 $ 98,991 Depreciation and amortization expense related to property and equipment for the years ended December 31, 2023 and 2022, totaled $ 40,992 and $ 43,742 , respectively. F- 16 Table of Contents Note 8. Intangible Assets The following table summarizes our intangible assets as of December 31, 2023 and 2022 and the changes during 2023: Weighted Average Useful Life (Years) Balance December 31, 2022 Additions Balance December 31, 2023 Intangible assets with estimated useful lives Customer relationships 8.0 $ 1,090,000 $ - $ 1,090,000 Non-compete agreements 3.0 120,000 - 120,000 Accumulated amortization ( 308,217 ) ( 176,244 ) ( 484,461 ) Sub-total 901,783 ( 176,244 ) 725,539 Intangible assets with indefinite lives Trade names Indefinite 280,000 - 280,000 Net identifiable intangible assets $ 1,181,783 $ ( 176,244 ) $ 1,005,539 As of December 31, 2023, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows: 2024 $ 146,307 2025 136,248 2026 136,248 2027 136,248 2028 136,248 Thereafter 34,240 Total $ 725,539 Note 9. Settlement of Litigation On April 28, 2023, the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”). On January 25, 2023, Gerald, as the result of the termination of his employment, filed a lawsuit against the Company for one year’s severance of $ 150,000 and benefits to which he claimed he was entitled under his employment agreement with the Company. He had 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 an anticipatory breach to release from escrow 43,648 shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement. 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 principal terms of the Settlement Agreement were: (a) All amounts due to Gerald related to the GMI acquisition, including the $ 1,500,000 of deferred consideration, were deemed satisfied and such obligations were extinguished; (b) The Company removed restrictions from 43,648 shares of the Company’s common stock; (c) The Company paid Gerald $ 25,000 as reimbursement for legal costs; and, (d) Gerald and the Company agreed to mutual general releases of one another. As a result of the settlement, the Company recognized a gain, net of expenses, of $ 1,442,468 . Note 10. Revolving Line of Credit On September 30, 2022, the Company entered a revolving line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $ 1,000,000 at a variable interest rate equal to the prime rate as published in The Wall Street Journal , with a minimum rate of 3.99 % and a maximum rate of 20.00 %, and subject to a borrowing base calculated using outstanding accounts receivable. Borrowings under the line of credit are secured by the assets of the Company. The line of credit initially expired on May 16, 2023, after which Summit made several extensions of the expiration date, with the most recent extension being made to May 16, 2024. In connection with an extension of the expiration date of the line of credit, the maximum amount of borrowings permitted under the line was reduced to $ 500,000 . As of December 31, 2023 and 2022, there was $ 500,000 and $ 425,000 outstanding, respectively, and $ 0 and $ 575,000 of borrowing availability, respectively. The interest rate in effect as of December 31, 2023, was 8.5 %. As of December 31, 2023, the fair value of debt outstanding on our revolving line of credit approximates its carrying value due to the short term nature of the facility. F- 17 Table of Contents Note 11. Income Taxes Income tax (benefit) expense for the years ended December 31, 2023 and 2022 consists of the following: 2023 2022 Current income tax (benefit) expense Federal $ ( 3,101 ) $ 2,533 State & Local 3,450 7,566 349 10,099 Deferred income tax (benefit) expense Federal ( 25,650 ) 795,001 State & Local ( 17,284 ) 7,357 ( 42,934 ) 802,358 Income tax (benefit) expense $ ( 42,585 ) $ 812,457 The income tax (benefit) expense is at an effective rate different from the federal statutory rate due principally to the following: 2023 2022 Loss from continuing operations before taxes $ ( 1,741,027 ) $ ( 5,493,471 ) Income tax benefit at federal statutory rate $ ( 365,616 ) $ ( 1,153,629 ) State income tax benefit, net of federal benefit ( 247,516 ) 13,334 Permanent Differences ( 1,782,519 ) 155,260 Net Operating Loss ("NOL") expirations 28,617 12,431 Other 31,234 ( 174,566 ) Change in federal valuation allowance 2,293,215 1,959,627 Income tax (benefit) expense $ ( 42,585 ) $ 812,457 Deferred Income Taxes Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows: 2023 2022 Deferred tax assets: Net operating losses $ 2,278,585 $ 2,649,902 Capital loss carryforward 2,187,720 - Stock-based compensation 742,282 743,915 Transaction costs 61,623 - Accrued vacations 41,287 46,665 Accrued commissions 4,980 17,836 Other 14,008 29,534 Deferred tax assets before valuation allowance 5,330,485 3,487,852 Valuation allowance ( 5,102,758 ) ( 2,793,271 ) Net deferred tax assets 227,727 694,581 Deferred tax liabilities: Intangible Assets ( 243,914 ) ( 753,702 ) Net deferred tax liabilities $ ( 16,187 ) $ ( 59,121 ) The Company has net operating loss carryforwards of approximately $ 15.4 million, of which $ 1.2 million will expire, if unused, between the years 2024 and 2037. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The Company has analyzed its income tax positions using the criteria required by U.S. GAAP and concluded that, as of December 31, 2023 and 2022, it has no material uncertain tax positions and no interest and penalties have been accrued. The Company has elected to recognize any estimated penalties and interest on its income tax liabilities as a component of its provision for income taxes. Our income tax returns are subject to examination by income taxing authorities in all jurisdictions for which we file tax returns, generally for three years after each return was filed, but extending to years from which net operating loss carryforwards are utilized to reduce current year taxes. We are not currently under audit in any jurisdiction. Note 12. 401 (k) Plans We have two 401 (k) Savings Plans that qualify as deferred salary arrangements under Section 401 (k) of the Internal Revenue Code. Under these 401 (k) Plans, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We recognized expense of $ 125,394 and $ 163,642 for the years ended December 31, 2023 and 2022, respectively, which is included in cost of professional fees and selling, general and administrative expenses on the consolidated statements of operations. F-18 Table of Contents Note 13. Stock-Based Compensation We have three stock-based compensation plans. The 2006 Stock Incentive Plan was adopted in 2006 ( “2006 Plan”) and had options granted under it through April 12, 2016. The 2016 Stock Incentive Plan ( “2016 Plan”) was adopted in 2016 ( “2016 Plan”) and had options granted under it through November 15, 2021. On October 11, 2021, the Board of Directors approved the 2021 Stock Incentive Plan ( “2021 Plan”) and on December 2, 2021, our shareholders approved the plan. The Company recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the awards. 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 % Determining the assumptions for the expected term and volatility requires management to exercise significant judgment. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility to that of several public company issuers that operate within its market segment. The guideline companies’ volatility was increased by a size adjustment premium to compensate for the difference in size between the guideline companies and the Company in its calculation. 2021 Stock Incentive Plan The 2021 Plan became effective October 11, 2021 and expires October 11, 2031. The 2021 Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards may be granted under the 2021 Plan is 500,000 . Options under the 2021 Plan expire no later than ten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The minimum exercise price of each option is the fair market value of the Company’s stock on the date of grant. Under the Plan, fair market value means the average of the reported high and low sale prices of our common stock on the Nasdaq Stock Market. As of December 31, 2023 and 2022, there were 330,700 and 350,700 , respectively, of outstanding unexpired options issued under the 2021 Plan, of which 169,520 and 129,500 , respectively, were exercisable, and there were 60,800 and 145,800 , respectively, options available to be granted. 2016 Stock Incentive Plan The 2016 Plan became effective June 1, 2016, and expires April 4, 2026. The 2016 Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards may be granted under the 2016 Plan is 1,000,000 . Options under the 2016 Plan expire no later than ten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The minimum exercise price of each option is the quoted market price of the Company’s stock on the date of the grant. As of December 31, 2023 and 2022, there were 53,100 and 77,350 options, respectively, of outstanding unexpired options under the 2016 Plan, of which 47,850 and 62,975 were exercisable, respectively. No additional options may be granted under the 2016 Plan. 2006 Stock Incentive Plan The 2006 Plan became effective May 18, 2006, and expired April 12, 2016. The 2006 Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards could be granted under the 2006 Plan was 195,000 . Options under the 2006 Plan expire no later than ten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vested over periods determined by the Board of Directors. There were 7,200 and 27,200 outstanding unexpired options remaining from the 2006 Plan as of December 31, 2023 and 2022, respectively, all of which were exercisable. The status of the options issued under the foregoing option plans as of December 31, 2023 and 2022, and changes during the years then ended were as follows: Shares Weighted average exercise price per share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2021 290,450 $ 31.70 4 years, 11 months $ 5,195,253 Options granted 195,200 28.15 Options exercised ( 26,400 ) 2.80 Options expired ( 500 ) 3.50 Options forfeited ( 3,500 ) 13.00 Outstanding at December 31, 2022 455,250 $ 32.05 6 years, 5 months $ 95,937 Options granted 85,000 2.11 Options exercised ( 2,000 ) 3.70 Options expired ( 59,750 ) 23.53 Options forfeited ( 87,500 ) 30.11 Outstanding at December 31, 2023 391,000 $ 27.43 5 years, 4 months $ 998 Exercisable at December 31, 2023 224,570 $ 36.61 4 years, 6 months $ 998 The total intrinsic value of options exercised in the years ended December 31, 2023 and 2022 was $ 610 and $ 756,888 , respectively. F- 19 Table of Contents Nonvested stock option awards as of December 31, 2023 and 2022, and changes during the years then ended were as follows: Nonvested Shares Weighted average exercise price per share Weighted average grant date fair value Nonvested at December 31, 2021 95,250 $ 40.70 $ 15.10 Granted 195,200 28.15 13.65 Vested ( 51,375 ) 39.00 14.70 Forfeited ( 3,500 ) 13.00 13.00 Nonvested at December 31, 2022 235,575 $ 31.10 $ 14.00 Granted 85,000 2.11 0.65 Vested ( 58,145 ) 33.47 13.82 Expired ( 8,500 ) 49.82 21.45 Forfeited ( 87,500 ) 30.11 12.68 Nonvested at December 31, 2023 166,430 $ 15.04 $ 6.60 As of December 31, 2023, unrecognized compensation cost associated with non-vested share-based employee and non-employee compensation totaled $ 329,622 , which is expected to be recognized over a weighted average period of 16 months. Note 14. Common Stock Purchase Agreement On July 8, 2022, we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, but not the obligation, to sell to B. Riley up to $ 15,000,000 of shares of the Company’s common stock, par value $ 0.001 per share (“Common Stock”), from time to time. Sales of Common Stock to B. Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B. Riley under the Purchase Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of 1933, as amended (the “Securities Act”) the resale by B. Riley of up to 4,500,000 shares of Common Stock that the Company may issue or elect, in the Company’s sole discretion, to issue and sell to B. Riley, from time to time under the Purchase Agreement. We issued 119,780 common shares valued at $ 150,000 to B. Riley as a commitment fee. The cost of the shares was charged to additional paid in capital during the twelve months ended December 31, 2023. During the twelve months ended December 31, 2023, the Company sold 27,429 shares of common stock under the Purchase Agreement at an average price of $ 6.30 per share, net of fees of approximately $ 0.30 per share. The net proceeds from these sales were $ 172,108 . There were no sales under the Purchase Agreement during the twelve months ended December 31, 2022. Note 15. Private Offerings of Common Stock On September 29, 2023, the Company sold 35,000 unregistered shares of its common stock to G. James Benoit, Jr., its chairman and chief executive officer, in a private offering at a price of $ 5.00 per share from which it raised $ 175,000 of immediately available cash proceeds. In August 2022 the Company sold 157,256 unregistered shares of its common stock in a private offering at a price of $ 12.00 per share from which it raised $ 1,887,000 of immediately available cash proceeds, including $ 600,000 from Mr. Benoit for 50,000 shares at $ 12.00 per share. The total offering costs associated with the sales of unregistered shares of common stock in 2023 and 2022 were not material. The shares in the private offering transactions in September of 2023 and August of 2022 were unregistered and subject to a holding period of up to one year under SEC Rule 144 before the securities are able to be sold in the public market. F- 20 Table of Contents Note 16. Loss Per Share Basic loss per share excludes dilution and is computed by dividing the loss attributable to common shareholders by the weighted-average number of shares outstanding for the period. Diluted (loss) income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss, because the inclusion of such items would be antidilutive. The antidilutive effect of 30,946 and 84,173 shares from stock options, and zero and 7,538 shares from warrants were excluded from diluted shares for the years ended December 31, 2023 and 2022, respectively. Note 17. Financial Statement Captions The following table summarizes the Company’s prepaid expenses and other current assets as of December 31, 2023 and 2022: 2023 2022 Deferred costs of revenue $ 87,988 $ 156,719 Stock issuance costs - 150,000 Prepaid insurance 116,496 96,168 Licenses and subscriptions 59,322 39,558 Other 3,545 - Total $ 267,351 $ 442,445 The following table summarizes the Company’s other current liabilities as of December 31, 2023 and 2022: 2023 2022 Legal and professional fees $ 242,240 $ 190,200 Cost of professional services - 45,762 Cost of software sales - 19,180 Directors' fees 21,250 - Interest expense 3,403 1,195 Other 711 27,160 Total $ 267,604 $ 283,497 F- 21 Table of Contents EXHIBIT INDEX Exhibit No. Exhibit 2.1 Plan of Domestication (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on December 16, 2021) 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on December 16, 2021) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on December 16, 2021) 4.1 Description of Securities (incorporated by reference to Exhibit 4.1 of the 2021 Company’s Annual Report on Form 10-K filed on April 12, 2022) 10.1+ Executive Employment Agreement, by and between the Company and G. James Benoit, Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 30, 2021) 10.2+ Executive Employment Agreement, by and between the Company and Timothy G. Hannon (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on March 24, 2022) 10.3 Form of Warrant (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 30, 2021) 10.4 Commercial Line of Credit Renewal Agreement, dated April 30, 2022, by and between the Company, Tellenger, Inc. and Summit Community Bank (incorporated by reference to Exhibit 10.4 of the 2022 Company's Annual Report on Form 10-K filed on April 17, 2023). 10.5 Business Loan Agreement, dated April 30, 2022, by and between the Company, Tellenger, Inc. and Summit Community Bank (incorporated by reference to Exhibit 10.5 of the 2022 Company's Annual Report on Form 10-K filed on April 17, 2023). 10.6 Commercial Security Agreement, dated April 30, 2022, by and between the Company, Tellenger, Inc. and Summit Community Bank (incorporated by reference to Exhibit 10.6 of the 2022 Company's Annual Report on Form 10-K filed on April 17, 2023). 10.7+ 2006 Stock Incentive Plan (incorporated by reference to Appendix A of the Company’s definitive proxy statement on Schedule 14A filed on April 19, 2006) 10.8+ 2016 Stock Incentive Plan (incorporated by reference to Exhibit A of the Company’s definitive proxy statement filed on April 11, 2016) 48 Table of Contents 10.9+ 2021 Stock Incentive Plan (incorporated by reference to Appendix 4 of the Company’s definitive proxy statement filed on October 26, 2021) 10.10 Form of Series A Warrant (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 16, 2021) 10.11 Common Stock Purchase Agreement by and between WaveDancer, Inc., and B. Riley Principal Capital II, LLC dated July 8, 2022 (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on July 11, 2022) 10.12 Registration Rights Agreement by and between WaveDancer, Inc., and B. Riley Principal Capital II, LLC dated July 8, 2022 (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed on July 11, 2022) 21.1* Subsidiaries of the Company 23.1* Consent of Independent Registered Public Accounting Firm, CohnReznick LLP 24.1* Power of Attorney (included as part of the signature page of this Annual Report on Form 10-K) 31.1* Rule 13a-14(a) / 15a-14(a) Certification by Chief Executive Officer 31.2* Rule 13a-14(a) / 15a-14(a) Certification by Chief Financial Officer 32.1** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS) + Management contract, compensatory plan or arrangement. * Filed herewith. ** Furnished herewith. 49 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WaveDancer, Inc. By: /s/ G. James Benoit G. James Benoit, Chief Executive Officer March 20, 2024 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints G. James Benoit and Timothy G. Hannon, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date By: /s/ G. James Benoit Chief Executive Officer March 20, 2024 G. James Benoit By: /s/ Timothy G. Hannon Chief Financial Officer March 20, 2024 Timothy G. Hannon By: /s/ Paul B. Becker Director March 20, 2024 Paul B. Becker By: /s/ James C. DiPaula, Jr. Director March 20, 2024 James C. DiPaula, Jr. By: /s/ Jack L. Johnson, Jr. Director March 20, 2024 Jack L. Johnson, Jr. By: /s/ William Pickle Director March 20, 2024 William Pickle By: /s/ Bonnie K. Wachtel Director March 20, 2024 Bonnie K. Wachtel 50