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. We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. 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. 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. 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. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report. 22 Table of Contents Firefly Neuroscience, Inc. (formerly WaveDancer, Inc.) Form 10-Q June 30, 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. We were historically 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 April 12, 2024, pursuant to the previously announced Agreement and Plan of Merger, dated as of November 15, 2023 (as amended by that certain Amendment No. 1, dated as of January 12, 2024, and that certain Amendment No. 2, dated as of June 17, 2024, “Merger Agreement”), by and among the Company, its wholly owned subsidiary, FFN Merger Sub, Inc., a Delaware corporation (“FFN”), and Firefly Neuroscience 2023, Inc., a Delaware corporation (formerly known as Firefly Neuroscience, Inc., “Firefly 2023”), FFN merged with and into Firefly 2023, with Firefly 2023 surviving as a wholly owned subsidiary of Firefly (the “Merger”). Following the consummation of the Merger with Firefly 2023, the business of Firefly 2023 became our business. Firefly is an Artificial Intelligence (“AI”) technology company developing innovative neuroscientific solutions that improve outcomes for patients with mental illnesses and neurological disorders. Its FDA-510(k) cleared Brain Network Analytics software platform (the “BNA Platform”) and is focused on advancing diagnostic and treatment approaches for people suffering from mental illnesses and cognitive disorders, including depression, dementia, anxiety disorders, concussions, and attention-deficit/hyperactivity disorder. It has taken a period of 15 years and an investment of approximately $60 million, to develop the software, compile the requisite database of brain wave tests, gain patent protection, and receive Federal Drug Administration (“FDA”) approval to market and sell the BNA Platform so, as of today, Firefly is in a position to undertake a commercial launch of the BNA Platform. Firefly believes there is great potential for such commercialization, both with respect to pharmaceutical companies in their drug research and clinical trial activities, as well as medical practitioners in their clinics. The BNA Platform is a software as a medical solution that was developed using AI and machine learning on Firefly’s extensive proprietary database of standardized, high-definition longitudinal electroencephalograms (“EEG”) of over 17,000 patients representing twelve disorders, as well as clinically normal patients. The BNA Platform, in conjunction with an FDA-cleared EEG system, can provide clinicians with comprehensive insights into brain function (cognition). These insights can enhance a clinician’s ability to accurately diagnose mental illnesses and cognitive disorders and to evaluate what therapy or drug is best suited to optimize a patient’s outcome. The clinical utility of EEG technology to support better outcomes for patients with mental illnesses and cognitive disorders has been well documented. Historically, clinical adoption of EEG by medical professionals, including psychiatrists, neurologists, nurse practitioners and general practitioners, has been limited due to the complexity of interpreting EEG recordings and the inability to practically compare a patient’s brain function to that of a clinically normal age-matched patient. Firefly believes that without defining a standard deviation to the norm, it is not possible to objectively assess brain function. By establishing an objective baseline measurement of brain function, the BNA Platform enables clinicians to optimize patient care, leading to improved outcomes for people suffering from mental illnesses and cognitive disorders. Firefly’s value proposition is supported by real-world use of the BNA Platform. Incorporating the BNA Platform as part of a patient management protocol demonstrated improved response rates, enhanced therapy compliance, reduced non-responder rates and a reduction in need for medication switching among patients1. Further, Firefly believes that its extensive clinical database, when combined with advanced AI, provides the opportunity to identify clinically relevant biomarkers that will support better patient outcomes through precision medicine and companion diagnostics. We expect to gather additional data through the clinical deployments and clinical studies conducted by drug companies. This additional data should allow us to discover new biomarkers and objectively measure the impact of therapeutic interventions on patients of different types, further enhancing our platform’s effectiveness. Firefly believes that it will be able to enhance accurate diagnosis and predict what therapy or drug, or a combination thereof, is best suited to optimize patient outcomes. This represents a paradigm shift in how clinicians manage patients with mental illnesses and cognitive disorders holding the potential to transform brain health. 23 Table of Contents Firefly Neuroscience, Inc. (formerly WaveDancer, Inc.) Form 10-Q June 30, 2024 Results of Continuing Operations – Three Months Ended June 30, 2024 and 2023 Revenue Total revenue was $1,903,602 for the three months ended June 30, 2024, compared with $2,024,622 in the prior year quarter, a decrease of $121,020, or 6.0%. The decrease was primarily related to professional services contracts, coupled with a de-emphasis on low margin product sales. Professional services revenue decreased by $93,860, or 4.8%, to $1,874,097 in the second quarter of 2024 from $1,967,957 in the second 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 second quarter of 2024 as compared to the comparable prior year quarter based on current project deliverables. Gross Profit Gross profit decreased by $22,318 or 3.2%, to $682,695 for the three months ended June 30, 2024, as compared to $705,013 in the prior year quarter. The increase in gross profit includes a decrease from professional services of $21,616 and a decrease from third-party software sales of $702. Professional services gross profit as a percent of revenue increased from 35.8% to 36.4% due to a change in the mix of contracts generating revenue, as well as billing rate increases outpacing increases in our costs of labor. Selling, General and Administrative Expenses The following table shows the major elements of SG&A expenses for the three months ended June 30, 2024 and 2023, and the changes between periods: 2024 2023 Increase/ (Decrease) Stock based compensation $ 60,216 $ 88,159 $ (27,943 ) Insurance 82,265 98,111 (15,846 ) Legal and professional fees 151,345 343,042 (191,697 ) Acquisition costs 73,947 336,141 (262,194 ) Governance and investor relations 96,901 72,365 24,536 Salaries and benefits 440,115 528,573 (88,458 ) All other 32,423 48,470 (16,047 ) Software, IT and office expenses 85,091 93,802 (8,711 ) Marketing and promotions 126 (7,967 ) 8,093 Depreciation & Amortization 42,336 53,669 (11,333 ) Total SG&A $ 1,064,765 $ 1,654,365 $ (589,600 ) The decrease in SG&A for the three months ended June 30, 2024, versus the same period in 2023 was led by decreases in acquisition costs as there were several transactions being explored simultaneously in early 2023, legal and professional fees as there were litigation matters in early 2023, and selling and administrative salaries and benefits. Operating (Loss) Income from Continuing Operations Our operating loss from continuing operations was $382,070 in the second quarter of 2024 as compared to operating income from continuing operations of $493,116 in the corresponding quarter in 2023, a decrease in operating income of $875,186. The change in operating loss from continuing operations from operating income is the result of the gain on litigation settlement realized in the second quarter of 2023. Without this gain, there would have been an operating loss from continuing operations in the second quarter of 2023 of $949,352, which would have represented an improvement of $567,282 in 2024 over 2023. This improvement is led by decreases in acquisition costs, legal and professional fees, and selling and administrative salaries and benefits. 24 Table of Contents Firefly Neuroscience, Inc. (formerly WaveDancer, Inc.) Form 10-Q June 30, 2024 Results of Discontinued Operations – Three Months Ended June 30, 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 second quarter of 2024. Following is the detail of discontinued operations for the second quarter of 2023: Results of Continuing Operations – Six Months Ended June 30, 2024 and 2023 Revenue Total revenue was $3,818,975 for the six months ended June 30, 2024, compared with $4,184,745 in the prior year, a decrease of $365,770, or 8.7%. The decrease was primarily related to professional services contracts, coupled with a de-emphasis on low margin product sales. Professional services revenue decreased by $311,449, or 7.6%, to $3,759,966 in the six months ended June 30, 2024, from $4,071,415 in the six months ended June 30, 2023. The decline in professional services revenue is driven primarily by a few of our historically larger projects where we had fewer resources deployed in the first six months of 2024 as compared to the comparable prior year period 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 $20,142 or 1.5%, to $1,381,953 for the six months ended June 30, 2024, as compared to $1,361,811 in the prior year period. The increase in gross profit includes an increase from professional services of $20,427 and a decrease from third-party software sales of $285. Professional services gross profit as a percentage of revenue increased from 33.4% due to a change in the mix of contracts generating revenue, as well as billing rate increases outpacing increases in our costs of labor. 25 Table of Contents Firefly Neuroscience, Inc. (formerly WaveDancer, Inc.) Form 10-Q June 30, 2024 Selling, General and Administrative Expenses The following table shows the major elements of SG&A expenses for the six months ended June 30, 2024 and 2023 and the changes between periods: 2024 2023 Increase/ (Decrease) Salaries and benefits $ 972,635 $ 1,094,916 $ (122,281 ) Stock based compensation 173,996 376,330 (202,334 ) Legal and professional fees 328,338 587,911 (259,573 ) Depreciation & Amortization 94,768 107,827 (13,059 ) Acquisition costs 232,318 444,518 (212,200 ) Software, IT and office expenses 160,045 179,344 (19,299 ) Governance and investor relations 194,717 207,538 (12,821 ) Insurance 218,951 164,046 54,905 Marketing and promotions 246 868 (622 ) All other 61,980 102,595 (40,615 ) Total SG&A $ 2,437,994 $ 3,265,893 $ (827,899 ) The decrease in SG&A for the six months ended June 30, 2024, versus the same period in 2023 was led by decreases in legal and professional fees as there were litigation matters in early 2023, acquisition costs as there were several transactions being explored simultaneously in early 2023, Stock based compensation as options vested or were forfeited over time, and selling and administrative salaries and benefits as administrative costs and positions were cut. Operating Income from Continuing Operations Our operating loss from continuing operations was $1,056,041 in the six months ended June 30, 2024 as compared to a loss of $461,614 in the corresponding prior year period, a additional loss of $594,427, or 128.8%. The increase in operating loss from continuing operations is the result of the gain on litigation settlement realized in the first six months of 2023. Without this gain, there would have been an operating loss from continuing operations in the second quarter of 2023 of $1,904,082, which would have represented an improvement of $848,041 in 2024 over 2023. This improvement is led by decreases in legal and professional fees, acquisition costs, stock based compensation, and selling and administrative salaries and benefits. Results of Discontinued Operations – Six Months Ended June 30, 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 six months ended June 30, 2024. Following is the detail of discontinued operations for the six months ended June 30, 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 ) 26 Table of Contents Firefly Neuroscience, Inc. (formerly WaveDancer, Inc.) Form 10-Q June 30, 2024 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 six months ended June 30, 2024, the Company generated a net loss from continuing operations of $1,056,041. As of June 30, 2024, the Company had a net working capital deficit of $746,040, including cash and cash equivalents of $244,137. As of June 30, 2024, the Company had $300,000 outstanding under its bank line of credit and no borrowing availability. The line of credit expired on July 16, 2024. On August 12, 2024, upon the close of the Merger transaction with Firefly, the lender was repaid in full. We used cash in continuing operations of $237,858 during the six months ended June 30, 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. For the remainder of fiscal year 2024 and the first half of 2025, we expect to continue to incur negative cash flows from operations as we continue to make targeted investments in sales and marketing and research and development of our next generation BNA Platform. Beyond the next 12 months, our ability to achieve profitability depends on the commercialization of our flagship product, the BNA Platform. We expect to incur significant costs for at least two to four years to commercialize and distribute our products, and we expect our expenses to increase in connection with our ongoing activities, particularly as we continue our research and development and expand our production capabilities as needed. As a result, we will require significant capital to support our ongoing operations and to drive our business strategy before we can be profitable. These factors raise substantial doubt about our ability to continue as a going concern. Managements plans are disclosed herein. Until we can generate adequate revenues from the sale of our products to cover our operating expenses and capital expenditure requirements, we expect to finance our operations through the sale of equity, debt financing, or other sources. There can be no guarantee that debt or equity financings will be available to us on commercially reasonable terms, if at all. Additionally, we may be unable to further pursue our business plan and we may be unable to continue operations. The report of our independent registered public accounting firm for the year ended December 31, 2023, states that there is substantial doubt about our ability to continue as a going concern. The estimates and assumptions underlying our belief in the sufficiency of our capital resources in the short term and our ability to obtain capital resources in the long term may prove to be wrong, and we could exhaust our capital resources sooner than we expect and may not be able to obtain resources on favorable terms, or at all. 27 Table of Contents Firefly Neuroscience, Inc. (formerly WaveDancer, Inc.) Form 10-Q June 30, 2024