FIREFLY NEUROSCIENCE, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Form 10-Q contains forward-looking statements regarding our business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements. Investors should read and understand the risk factors detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“Annual Report”) and in other filings with the Securities and Exchange Commission. We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This list highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer. These risks include, among others, the following: ● Recent, past and future acquisitions and investments could disrupt our business and harm our financial condition and operating results. ● We have had operating losses in four of the last five years and may not achieve or maintain profitability in the future. ● A significant portion of our revenue is expected to be generated by sales to government entities, which are subject to a number of challenges and risks. ● We face intense competition and could lose market share to our competitors, which could adversely affect our business, financial condition, and results of operations. ● We rely on our management team and other key employees and will need additional personnel to grow our business, and the loss of one or more key employees or our inability to hire, integrate, train and retain qualified personnel, including members for our board of directors, could harm our business. ● We are dependent on a few key customer contracts for a significant portion of our future revenue, and a significant reduction in services to one or more of these contracts would reduce our future revenue and harm our anticipated operating results. ● Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products without compensating us. ● We are dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations. ● We depend on computing infrastructure operated by Microsoft and other third parties to support some of our solutions and customers, and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations. ● Failure to comply with governmental laws and regulations could harm our business. ● Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business. ● The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members. ● If we are not able to maintain and enhance our brand and our reputation as a provider of high-quality security solutions and services, our business and results of operations may be adversely affected. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A of our 2022 10-K. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report. 18 Table of Contents WaveDancer, Inc. Form 10-Q March 31, 2024 Our Business Founded in 1979 as Information Analysis Incorporated, the Company changed its name to WaveDancer, Inc. and converted from a Virginia corporation to a Delaware corporation in December 2021. The Company is in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations. On March 17, 2023, the Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). The Company’s retained interest in GMI of 24.9% was initially accounted for as an equity method investment. Subsequent to the sale the Company discontinued consolidating GMI and the Company has reflected GMI as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures throughout this Item 2 relate to the Company’s continuing operations. See Note 2 to the unaudited condensed consolidated financial statements for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation. On August 9, 2023, the Company sold its remaining 24.9% interest in GMI to GMDC. On August 9, 2023, the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. As of September 30, 2023 the Company has no equity method investment in GMDC and any other equity exposure to the GMI business. The Company is an IT provider primarily for the benefit of federal government agencies. At present, we primarily apply our technology, services and experience to legacy software migration and modernization, developing web-based and mobile device solutions, including dynamic electronic forms development and conversion, data analytics, and we are in the process of acquiring talent and expertise in developing cybersecurity and cloud services practices. Our focus is on enterprise IT solutions primarily relating to system modernization, cloud-based solutions and cybersecurity protection. Since the Company’s inception, we have performed software development and conversion projects for over 100 commercial and government customers including, but not limited to, the Department of Agriculture, Department of Defense, Department of Education, Department of Homeland Security, Department of the Treasury, U.S. Small Business Administration, U.S. Army, U.S. Air Force, Department of Veterans Affairs, and General Dynamics Information Technology (formerly Computer Sciences Corporation, CSRA). Modernization has been a core competency of the Company for over 20 years. We have modernized over 100 million lines of COBOL code for over 35 governmental and commercial customers. We maintain a pool of skilled COBOL programmers. This provides us with a competitive advantage as the labor pool of such programmers is shrinking as aging software professionals retire. Our business has also historically relied upon the reselling of applications, primarily for forms development. Through our acquisition in April 2021 of Tellenger, Inc. (“Tellenger”), which is now a wholly owned subsidiary of the Company, we acquired competencies in web-based solutions and cybersecurity. Tellenger is a boutique IT consulting and software development firm specializing in modernization, software development, cybersecurity, cloud solutions, and data analytics. We believe combining web-based solutions with system modernization will provide us with the skill sets that are needed to migrate legacy systems to the cloud. We foresee this as a key component of our modernization growth since there are billions of lines of code, in both the governmental and commercial sectors, that eventually must be modernized. It is also our intention to better leverage our resources, largely gained through the acquisition of Tellenger, to take advantage of the growth in the cybersecurity market. In December 2021, we announced the reorganization of our entire professional services practice into Tellenger, and as a result, our professional services are contained in a single entity. Through Tellenger, we perform services such as business process re-engineering, cloud migrations, and Software-as-a-Service, or SaaS, implementations on behalf of clients in the private and public sector with an aim to increase productivity, gain efficiencies, and achieve key performance indicators. 19 Table of Contents WaveDancer, Inc. Form 10-Q March 31, 2024 Our Strategy On November 15, 2023, the Company entered into a merger agreement with Firefly Neuroscience, Inc. (“Firefly”), a privately held, commercial-stage, medical technology company, to combine the companies in an all-stock transaction (the "Merger"). The closing of the transaction is contingent upon the approval of WaveDancer and Firefly shareholders, both of which have been obtained, as well as satisfaction of other closing conditions including, among other things, the Company having sufficient cash to satisfy all its outstanding liabilities as of the closing date and approval by Nasdaq Capital Markets LLC ("Nasdaq") of Firefly's initial listing application. The Merger agreement provides that in connection with and nearly simultaneous with the closing of the Merger, WaveDancer will sell its Tellenger subsidiary, the company through which WaveDancer operates its current revenue-generating business, to WaveTop Solutions, Inc., a company owned and controlled by WaveDancer's chairman and chief executive officer, for $1.5 million of cash. Upon closing of the Merger, the combined company will focus on continuing to develop and commercialize Firefly’s Artificial Intelligence driven Brain Network Analytics (BNA™) platform, which was previously cleared by the U.S. Food and Drug Administration. Since late 2023, we have been devoting our efforts to closing the Merger with Firefly. If the Merger does not close, we will need to make fundamental decisions as to how to proceed with our business. We anticipate that we will be delisted from Nasdaq. We can operate profitably but cannot support the administrative expenses of being a public reporting company. We will consider all of our options, including, but not limited to, ceasing to be a reporting company (which would reduce our operating expenses significantly), raising capital through private placement (which could be highly dilutive), transferring to the OTC Market, seeking another merger partner (which may be difficult if we are delisted from Nasdaq), or selling our business to satisfy our liabilities and dissolving. To pursue any strategy under which we continue operations, we will need to reduce our expense structure and raise capital. The key elements of the strategy for continuing operations that we will pursue if the Merger does not close are discussed below. Through the acquisition of Tellenger in 2021, we began to reposition our legacy professional services business by allocating resources away from third-party product reselling and toward professional services, which provides more consistent revenue at significantly higher margins. If the Merger does not close, we may seek to purchase other technology companies whose businesses complement the Company’s existing business and whose personnel would better enable us to compete for engagements in our focus areas. Pursuing growth through acquisition will require substantial additional capital, which will be more difficult and dilutive without our ability to trade on Nasdaq. To grow organically, we intend to become more proactive in bidding as a prime contractor on government proposals and in expanding our outreach to larger prime contractors for subcontract and teaming opportunities. In the current era of digital transformation, companies of all sizes and types recognize the need to leverage enhanced technology to improve their business capabilities, operational efficiencies, and customer experiences. If they approach digital transformation in a structured, timely way they can gain benefits that give them an improved competitive advantage, reduce their time to market, improve the quality of their offerings, and revolutionize their culture in a positive way. Challenges in providing services to citizens throughout the COVID-19 pandemic heightened awareness and accelerated the progress of modernizations efforts with the U.S. Government. Many government agencies became focused on developing their own government digital strategies in order to improve productivity, streamline data sharing, reduce errors and reduce expenses. Automation also gives governments the information they need to make data-driven decisions. WaveDancer’s offering has the ability to offer a comprehensive set of technology services , that are built on a foundation of innovative technologies, to provide greater flexibility, agility, and security for IT transformations. We will be able to help organizations modernize, transform and manage their technologies. We plan to capitalize on these opportunities in outreach and bids to market our relevant products and services. 20 Table of Contents WaveDancer, Inc. Form 10-Q March 31, 2024 Results of Continuing Operations – Three Months Ended March 31, 2024 and 2023 Revenue Total revenue was $1,915,372 for the three months ended March 31, 2024, compared with $2,160,123 in the prior year quarter, a decrease of $244,751, or 11.3%. The decrease in revenue was driven by our de-emphasis of third-party software sales which accounted for just 1.5% of our sales in the first quarter of 2024 as compared to 2.6% in the prior year quarter. Professional services revenue decreased by $217,591, or 10.3%, to $1,885,867 in the first quarter of 2023 from $2,103,458 in the first quarter of 2023. The decline in professional services revenue is driven primarily by one of our historically larger projects where we had fewer resources deployed in the first quarter of 2024 as compared to the comparable prior year quarter based on current project deliverables, as well as the discontinuation of a software training service under which our resources were continuously underutilized. Gross Profit Gross profit increased by $42,460 or 6.5%, to $699,258 for the three months ended March 31, 2024 as compared to $656,798 in the prior year quarter. The increase in gross profit includes an increase from professional services of $42,041 and an increase from third-party software sales of $419. Professional services gross profit as a percent of revenue increased from 31.2% to 37.1% due to a change in the mix of contracts generating revenue and the related billing rates resulting as well as increases in our costs of labor that outpaced billing rate increases. Selling, General and Administrative Expenses The following table shows the major elements of SG&A expenses for the three months ended March 31, 2024 and 2023 and the changes between periods: 2024 2023 Increase/ (Decrease) Stock based compensation 113,780 288,171 (174,391 ) Insurance 136,686 65,935 70,751 Legal and professional fees 176,994 244,870 (67,876 ) Acquisition costs 158,371 108,377 49,994 Governance and investor relations 97,816 135,173 (37,357 ) Salaries and benefits $ 532,519 $ 566,343 $ (33,824 ) All other 29,556 54,124 (24,568 ) Software, IT and office expenses 74,955 85,542 (10,587 ) Marketing and promotions 120 8,835 (8,715 ) Depreciation & Amortization 52,432 54,158 (1,726 ) Total SG&A $ 1,373,229 $ 1,611,528 $ (238,299 ) Operating Income from Continuing Operations Our operating loss from continuing operations was $673,971 in the first quarter of 2024 as compared to a loss of $954,730 in the corresponding quarter in 2023, an improvement of $280,759, or 29.4%. The decrease in the operating loss from continuing operations is primarily the result of the decrease in SG&A expenses, led by a decrease in stock based compensation of $174,391 and decreases in legal and professional fees and governance and investor relations, and an increase in professional services gross profit of $42,041, partially offset by increases in insurance and acquisition costs. 21 Table of Contents WaveDancer, Inc. Form 10-Q March 31, 2024 Results of Discontinued Operations – Three Months Ended March 31, 2024 and 2023 The sale of GMI to GMDC occurred on March 17, 2023, and as a result, there was no activity for GMI in the first quarter of 2024. Following is the detail of discontinued operations for the first quarter of 2023: 2023 Revenue $ - Cost of revenue 74,223 Gross profit (74,223 ) Operating expenses - Salaries and benefits 484,249 Depreciation and amortization 85,338 Stock based compensation, before forfeitures 65,487 Forfeitures of stock options (407,322 ) Other operating expenses 134,633 Gain on sale of GMI (100,615 ) Loss before income tax benefit (335,993 ) Income tax benefit - Net income on discontinued operations $ (335,993 ) Critical Accounting Estimates Our accounting policies are described in Note 1 of our consolidated financial statements – Summary of Significant Accounting Policies . Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2023. Liquidity and Capital Resources During the quarter ended March 31, 2024, the Company generated a net loss from continuing operations of $673,950. As of March 31, 2024, the Company had a net working capital deficit of $480,073, including cash and cash equivalents of $563,324. As of March 31, 2024, the Company had $500,000 outstanding under its bank line of credit and no borrowing availability. The line of credit expires on May 16, 2024. The Company is seeking a short-term extension from the lender to allow for additional time to close the Merger transaction in early June 2024, upon which the lender will be repaid in full. In the absence of an extension, the Company and FireFly are considering options to prevent or resolve the issues arising from a default. The Company's current focus is on closing the Merger. Under the terms of the Merger agreement, we must have Parent Net Cash of no less than zero on the closing date. Parent Net Cash means the amount of cash on hand, including the proceeds from the Tellenger Sale transaction of $1.5 million, less all of our liabilities - other than the operating liabilities associated with Tellenger - on the closing date, including transaction costs and severance obligations. If the Company and Firefly are unable to raise the capital required to consummate the Merger, or FireFly's Nasdaq application is not timely approved, and the Merger transaction does not close, we will likely be delisted from the Nasdaq as a result of not meeting the minimum stockholders’ equity requirement for continued listing. If the Merger fails to close and we are delisted, we will consider all of our options, including, but not limited to, ceasing to be a reporting company (which would reduce our operating expenses significantly), raising capital through private placement (which could be highly dilutive), transferring to the OTC Market, seeking another merger partner (which may be difficult if we are delisted from Nasdaq), or selling our business to satisfy our liabilities and dissolving. In any scenario where we maintain continuing operations, in addition to reducing our expense structure, we would likely need to raise additional capital to meet our liquidity commitments through the end of 2024 and beyond. It is unlikely that our line of credit will continue to be extended in the absence of an imminent merger transaction. 22 Table of Contents WaveDancer, Inc. Form 10-Q March 31, 2024 We used cash in continuing operations of $118,671 during the three months ended March 31, 2024 and anticipate that over the twelve months from the date of these financial statements our operating activities may use as much as $1.0 million to $1.5 million. The Company has no commitments for capital spending nor any plans for material capital expenditures.