Core Insights - Firefly Neuroscience, Inc. is participating in the Capital Event Management Conference from November 22-24, 2024, in Aventura, Florida [1] - The company specializes in developing AI solutions aimed at improving brain health outcomes for patients with neurological and mental disorders [4][5] Company Overview - Firefly is focused on innovative solutions that enhance diagnostic and treatment monitoring methods for conditions such as depression, dementia, anxiety disorders, concussions, and ADHD [4] - The company has developed the FDA-510(k) cleared Brain Network Analytics (BNA™) technology, which utilizes a proprietary database of brain wave tests and has secured patent protection [4][5] - BNA™ leverages artificial intelligence and machine learning on a database of standardized, high-definition longitudinal electroencephalograms (EEGs) from over 17,000 patients, providing comprehensive insights into brain function [5] Market Engagement - Firefly is launching BNA™ commercially, targeting pharmaceutical companies involved in drug research and clinical trials, as well as medical practitioners for clinical use [4] - The company aims to enhance clinicians' ability to accurately diagnose mental and cognitive disorders and evaluate optimal therapies for patients [5]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2024 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-41092 FIREFLY NEUROSCIENCE, INC. (Exact name of registrant as specified in its charter) Delaware 54-1167364 (State or other jurisdiction of incorporation or organization) (I. ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-41092 WaveDancer, Inc. (Exact name of registrant as specified in its charter) Delaware 54-1167364 (State or other jurisdiction of incorporation or organization) (I.R.S. Empl ...

Merger and Acquisitions - The company entered into a merger agreement with Firefly Neuroscience, Inc. in an all-stock transaction, requiring the raising of $0.8 million to $1.1 million in additional capital[17] - The company plans to sell its Tellenger subsidiary to WaveTop Solutions, Inc. as part of the merger process[17] - If the merger does not close, the company will pursue organic growth and acquisitions, necessitating capital raising to fund these strategies[18] Business Operations and Services - The company aims to modernize legacy systems and cloud services, having provided solutions to over 40 government and private sector clients[25] - Tellenger's modernization services include cloud assessment and migration, utilizing platforms like Amazon Web Services and Microsoft Azure[26] - The cybersecurity market is a focus area, with Tellenger involved in significant initiatives for the U.S. Department of Homeland Security[27] Financial Performance - The company has incurred net losses of $2,034,435, $17,753,838, $1,131,449, and $717,246 during the years ended December 31, 2023, 2022, 2021, and 2019, respectively[57] - A significant portion of the company's revenues is derived from U.S. government contracting, with higher revenues typically experienced in the third and fourth fiscal quarters[58] - The company has faced operating losses in four of the last five years and may not achieve or maintain profitability in the future[56] Competition and Market Challenges - The company faces strong competition in the IT services market, particularly in conversion and modernization, from larger firms with more resources[36] - The company is subject to intense competition in software development and cloud services, which could negatively impact its operational results[80] - Changes in U.S. federal government funding priorities may materially and adversely affect the company's revenue and earnings[70] Risks and Liabilities - Future acquisitions may result in debt, contingent liabilities, and other expenses that could harm the company's financial condition[55] - The company must accurately estimate costs and timelines for contracts to maintain profitability, as inaccuracies could lead to adverse financial impacts[82] - The company frequently utilizes subcontractors, which may adversely affect contracts if they fail to perform, potentially leading to unintended expenses and loss of future contracts[85] Compliance and Regulatory Issues - The company must maintain effective internal controls over financial reporting to ensure accuracy; failure to do so could adversely affect business and stock price[95] - Compliance with public company regulations has increased legal and financial compliance costs, diverting management's attention and resources[118] Human Resources and Hiring - As of December 31, 2023, the company had 42 full-time and one part-time employees, with plans for future hiring to meet growth requirements[42] - The company faces intense competition for hiring qualified personnel, which is critical for its future success[121] Capital and Financing - The company does not intend to pay dividends for the foreseeable future, focusing instead on retaining earnings for business expansion[104] - The issuance of additional stock could dilute existing shareholders' investments, potentially leading to a decline in the market price of common stock[102] - The company may seek credit facilities to fund operations, which could expose it to additional risks associated with leverage and affect operational flexibility[111] Operational Variability and Risks - Variability in operational results is expected due to factors such as customer retention, seasonal buying patterns, and changes in market needs[126] - The company may face significant fluctuations in financial results, making historical performance unreliable for future expectations[127] - Legal proceedings and claims could result in substantial costs and divert management's attention, potentially harming the business[130] - The company is subject to risks from natural disasters and geopolitical unrest, which could disrupt supply chains and impact sales[132] Technological Adaptation - Rapid technological changes in the IT industry necessitate continuous development and adaptation of services to avoid negative impacts on operations[133]

PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis [Item 1. Unaudited Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section presents WaveDancer, Inc.'s unaudited condensed consolidated financial statements for the periods ended September 30, 2023, and December 31, 2022, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity. It also includes detailed notes on significant accounting policies, the sale of its GMI subsidiary, revenue recognition, leases, fair value measurements, intangible assets, stock-based compensation, litigation settlement, credit facilities, stock sales, income taxes, and earnings per share [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity | ASSETS | September 30, 2023 | December 31, 2022 | |:-------------------------------------------------------------------------------------------------------------------|:-------------------|:------------------| | Cash and cash equivalents | $ 877,198 | $ 731,081 | | Accounts receivable | 1,479,780 | 1,629,559 | | Prepaid expenses and other current assets | 363,668 | 442,445 | | Total current assets | 2,720,646 | 2,803,085 | | Intangible assets, net | 1,049,600 | 1,181,783 | | Goodwill | 1,125,101 | 1,125,101 | | Total assets | $ 5,261,805 | $ 7,981,214 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $ 495,895 | $ 573,789 | | Revolving line of credit | 500,000 | 425,000 | | Total current liabilities | 2,183,271 | 3,888,412 | | Total liabilities | 2,377,182 | 4,251,311 | | Total stockholders' equity | 2,884,623 | 3,729,903 | | Total liabilities and stockholders' equity | $ 5,261,805 | $ 7,981,214 | - Total assets decreased by approximately **$2.7 million** from December 31, 2022, to September 30, 2023, primarily due to the sale of assets held for sale (GMI subsidiary)[6](index=6&type=chunk) - Total liabilities decreased by approximately **$1.8 million**, largely driven by a reduction in deferred acquisition consideration[6](index=6&type=chunk) - Stockholders' equity decreased by approximately **$0.8 million**, mainly due to the accumulated deficit[6](index=6&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section outlines the company's financial performance, including revenues, gross profit, and net income or loss for specified periods | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | |:------------------------------------------------------------------------------------------------------------------|:--------------------------------|:--------------------------------| | Total revenues | $ 1,967,277 | $ 2,306,379 | | Gross profit | 649,812 | 738,596 | | Operating income (loss) from continuing operations | (516,845) | (1,130,118) | | Net income (loss) from continuing operations | (149,932) | (1,170,367) | | Net income (loss) | (149,932) | (4,700,519) | | Basic and diluted net loss per share | $ (0.08) | $ (2.56) | | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:------------------------------------------------------------------------------------------------------------------|:-------------------------------|:-------------------------------| | Total revenues | $ 6,152,022 | $ 9,052,411 | | Gross profit | 2,011,623 | 2,338,907 | | Operating loss from continuing operations | (978,459) | (4,406,450) | | Net loss from continuing operations | (929,106) | (5,251,620) | | Net loss | $ (1,265,099) | $ (8,304,268) | | Basic and diluted net loss per share | $ (0.65) | $ (4.70) | - For the three months ended September 30, 2023, total revenues decreased by **14.7%** YoY, primarily due to a de-emphasis on third-party software sales and a decline in professional services revenue[8](index=8&type=chunk)[98](index=98&type=chunk) - Operating loss from continuing operations improved significantly by **54.3%** for the three months ended September 30, 2023, mainly due to a substantial decrease in Selling, General and Administrative (SG&A) expenses[8](index=8&type=chunk)[101](index=101&type=chunk) - For the nine months ended September 30, 2023, total revenues decreased by **32.0%** YoY, driven by reduced third-party software sales and professional services[9](index=9&type=chunk)[103](index=103&type=chunk) - Operating loss from continuing operations improved by **77.8%** for the nine months ended September 30, 2023, benefiting from a litigation settlement gain and lower SG&A expenses[9](index=9&type=chunk)[107](index=107&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's cash flow activities from operations, investing, and financing for the reporting periods | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:-------------------------------------------------|:-------------------------------|:-------------------------------| | Net cash used in operating activities | $ (2,713,436) | $ (5,100,233) | | Net cash provided by (used in) investing activities | 2,335,974 | (234,060) | | Net cash provided by financing activities | 523,579 | 1,924,642 | | Net increase (decrease) in cash and cash equivalents | 146,117 | (3,409,651) | | Cash and cash equivalents, end of period | $ 877,198 | $ 1,521,651 | - Net cash used in operating activities decreased by approximately **$2.4 million**, primarily due to adjustments reconciling net loss, including a gain on litigation settlement and a gain on sale of equity investment[11](index=11&type=chunk) - Investing activities provided **$2.3 million** in cash, a significant improvement from a net use of **$0.2 million** in the prior year, driven by proceeds from the sale of equity investment and disposal of business[11](index=11&type=chunk) - Financing activities provided **$0.5 million**, a decrease from **$1.9 million** in the prior year, mainly due to lower proceeds from stock issuance[11](index=11&type=chunk) [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) This section details the changes in the company's stockholders' equity over the reporting period | Stockholders' Equity Component | Balance at Dec 31, 2022 | Balance at Sep 30, 2023 | |:-------------------------------|:------------------------|:------------------------| | Common Stock | $ 2,084 | $ 2,148 | | Additional Paid-In Capital | 35,883,831 | 36,303,586 | | Accumulated Deficit | (31,190,801) | (32,455,900) | | Treasury Stock | (965,211) | (965,211) | | Total Stockholders' Equity | $ 3,729,903 | $ 2,884,623 | - Total stockholders' equity decreased by **$845,280** from December 31, 2022, to September 30, 2023, primarily due to a net loss of **$1,349,952** and **$149,932** in subsequent quarters, partially offset by stock option compensation and stock issuance[13](index=13&type=chunk) - Additional paid-in capital increased by **$419,755**, reflecting stock option compensation and stock issuances, net of forfeiture and amortization of stock issue costs[13](index=13&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [Note 1. Summary of Significant Accounting Policies](index=11&type=section&id=Note%201.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the company's key accounting principles and practices, including business operations and going concern considerations - WaveDancer, Inc. (formerly Information Analysis Incorporated) develops and maintains IT systems and provides IT-related professional services to government and commercial organizations[16](index=16&type=chunk) - On March 17, 2023, the Company sold **75.1%** of its Gray Matters, Inc. (GMI) subsidiary, classifying GMI as a discontinued operation[17](index=17&type=chunk)[18](index=18&type=chunk) - The Company reported an operating loss of **$978,459** for the nine months ended September 30, 2023, and anticipates needing **$1.0 million** to **$1.5 million** in additional capital within the next twelve months, raising substantial doubt about its ability to continue as a going concern[19](index=19&type=chunk) - A one-for-ten reverse stock split was effected on October 18, 2023, retroactively adjusting all shares and per-share amounts[21](index=21&type=chunk) - The Company accounts for investments where it holds **20%** to **50%** equity or has significant influence using the equity method[26](index=26&type=chunk)[27](index=27&type=chunk) | Revenue Source (3 months ended Sep 30, 2023) | Percentage of Revenue | |:---------------------------------------------|:----------------------| | Prime contracts with U.S. government agencies | 8.3% | | Subcontracts under federal procurements | 90.6% | | Revenue Source (9 months ended Sep 30, 2023) | Percentage of Revenue | |:---------------------------------------------|:----------------------| | Prime contracts with U.S. government agencies | 9.1% | | Subcontracts under federal procurements | 89.3% | [Note 2. Sale and Deconsolidation of GMI and Discontinued Operations](index=15&type=section&id=Note%202.%20Sale%20and%20Deconsolidation%20of%20GMI%20and%20Discontinued%20Operations) This note details the sale of the GMI subsidiary and the financial impact of discontinued operations - On March 17, 2023, WaveDancer sold **75.1%** of its GMI subsidiary to Gray Matters Data Corporation (GMDC), receiving **24.9%** equity in GMDC, **$935,974** cash, and contingent annual payments[36](index=36&type=chunk) - The Company recognized a gain of **$100,615** on the sale of GMI in Q1 2023, included in net loss from discontinued operations[37](index=37&type=chunk) - On August 9, 2023, WaveDancer sold its remaining **24.9%** equity interest in GMDC for **$400,000** cash, recognizing a gain of **$64,525**[38](index=38&type=chunk) | Discontinued Operations (Nine Months Ended Sep 30) | 2023 | 2022 | |:---------------------------------------------------|:--------------|:--------------| | Revenue | $ - | $ 566,862 | | Cost of revenue | 74,223 | 1,118,301 | | Net loss on discontinued operations | $ (335,993) | $ (3,052,648) | - During the nine months ended September 30, 2023, **715,000** unvested stock options were forfeited by GMI employees, resulting in a **$407,322** reversal of previously recognized stock-based compensation expense[40](index=40&type=chunk) [Note 3. Revenue from Contracts with Customers](index=16&type=section&id=Note%203.%20Revenue%20from%20Contracts%20with%20Customers) This note describes the company's revenue recognition policies and disaggregates revenue by contract type - Revenue is generated from IT professional services, sales of third-party software licenses, implementation/training services, support/maintenance contracts, and incentive payments from software suppliers[43](index=43&type=chunk) - Professional services revenue is recognized over time for time and materials, at a point in time for fixed-price-per-unit, and either over time or at a point in time for fixed-price and mixed arrangements[45](index=45&type=chunk) - Third-party software license revenue recognition varies by license type (enterprise server-based vs. desktop) and customer type (government vs. non-government), generally recognized at a point in time when the customer gains full benefit or administrative portal access[46](index=46&type=chunk) | Contract Type (3 months ended Sep 30) | 2023 Amount | 2023 Percentage | 2022 Amount | 2022 Percentage | |:--------------------------------------|:--------------|:----------------|:--------------|:----------------| | Services time & materials | $ 1,714,509 | 87.2% | $ 1,896,829 | 82.2% | | Third-party software | 45,977 | 2.3% | 59,076 | 2.6% | | Total revenue | $ 1,967,277 | 100.0% | $ 2,306,379 | 100.0% | | Contract Type (9 months ended Sep 30) | 2023 Amount | 2023 Percentage | 2022 Amount | 2022 Percentage | |:--------------------------------------|:--------------|:----------------|:--------------|:----------------| | Services time & materials | $ 5,314,845 | 86.4% | $ 5,963,361 | 65.9% | | Third-party software | 159,307 | 2.6% | 2,345,884 | 25.9% | | Total revenue | $ 6,152,022 | 100.0% | $ 9,052,411 | 100.0% | | Accounts Receivable (as of) | Sep 30, 2023 | Dec 31, 2022 | |:----------------------------|:--------------|:--------------| | Billed federal government | $ 1,456,519 | $ 1,573,407 | | Total accounts receivable | $ 1,479,780 | $ 1,629,559 | - Contract liabilities, representing invoiced amounts not yet recognized as revenue, decreased from **$182,756** at December 31, 2022, to **$26,026** at September 30, 2023[52](index=52&type=chunk) [Note 4. Leases](index=20&type=section&id=Note%204.%20Leases) This note provides details on the company's operating leases, including lease terms and future payment obligations - The Company has two significant operating leases for its headquarters and additional office space, with terms ranging from **37** to **67 months** and annual rental rate escalations of approximately **2.5%**[57](index=57&type=chunk) - As of September 30, 2023, the weighted average remaining lease term was **28 months**, and the weighted average discount rate was **5.1%**[60](index=60&type=chunk) | Future Lease Payments (as of Sep 30, 2023) | Amount | |:-------------------------------------------|:------------| | 2023 | $ 58,041 | | 2024 | 174,721 | | 2025 | 74,804 | | 2026 | 70,220 | | Total lease payments | 377,786 | | Present value of lease liabilities | $ 353,485 | - Total lease expense for operating leases was **$38,053** for the three months ended September 30, 2023 (down from **$53,560** in 2022) and **$118,567** for the nine months ended September 30, 2023 (down from **$164,281** in 2022)[60](index=60&type=chunk) [Note 5. Fair Value Measurements](index=21&type=section&id=Note%205.%20Fair%20Value%20Measurements) This note describes the company's fair value measurements for financial instruments, categorized by input levels - Fair value is defined as the exit price in an orderly transaction between market participants, categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[61](index=61&type=chunk) | Cash Equivalents (Money Market Funds) | Sep 30, 2023 | Dec 31, 2022 | |:--------------------------------------|:-------------|:-------------| | Level 1 | $ 809,997 | $ 58,242 | | Total | $ 809,997 | $ 58,242 | - The contingent consideration received from the GMI sale, initially valued at **$682,000** (Level 3), was settled for **$1,000,000** cash on August 9, 2023, resulting in a gain of **$318,000**[62](index=62&type=chunk) [Note 6. Intangible Assets and Goodwill](index=21&type=section&id=Note%206.%20Intangible%20Assets%20and%20Goodwill) This note provides information on the company's intangible assets and goodwill, including amortization schedules | Intangible Assets (as of) | Dec 31, 2022 | Sep 30, 2023 | |:--------------------------|:--------------|:--------------| | Customer relationships | $ 1,090,000 | $ 1,090,000 | | Non-compete agreements | 120,000 | 120,000 | | Accumulated amortization | (308,217) | (440,400) | | Sub-total | 901,783 | 769,600 | | Trade names (indefinite) | 280,000 | 280,000 | | Total identifiable intangible assets | $ 1,181,783 | $ 1,049,600 | - Total identifiable intangible assets decreased by **$132,183** from December 31, 2022, to September 30, 2023, primarily due to accumulated amortization[65](index=65&type=chunk) | Expected Amortization Expense | Amount | |:------------------------------|:------------| | 2023 | $ 44,061 | | 2024 | 146,307 | | 2025 | 136,248 | | 2026 | 136,248 | | 2027 | 136,248 | | Thereafter | 170,488 | | Total | $ 769,600 | [Note 7. Stock-Based Compensation](index=22&type=section&id=Note%207.%20Stock-Based%20Compensation) This note details the company's stock-based compensation plans and related expenses - The Company has three stock-based compensation plans (2006, 2016, and 2021 Stock Incentive Plans)[67](index=67&type=chunk)[69](index=69&type=chunk) - Total compensation expense related to these plans was **$180,816** for the three months ended September 30, 2023 (down from **$398,319** in 2022) and **$557,146** for the nine months ended September 30, 2023 (down from **$971,777** in 2022)[71](index=71&type=chunk) - As of September 30, 2023, **$431,067** of total unrecognized compensation cost related to nonvested share-based compensation is expected to be recognized over a weighted-average period of **11 months**[70](index=70&type=chunk) [Note 8. Settlement of Litigation](index=23&type=section&id=Note%208.%20Settlement%20of%20Litigation) This note describes the settlement of litigation, including its financial impact on deferred consideration - On April 28, 2023, WaveDancer settled litigation with Jeffrey Gerald, extinguishing **$1,500,000** of deferred consideration related to the GMI acquisition and releasing **43,648 shares** of common stock from escrow[72](index=72&type=chunk)[73](index=73&type=chunk) - As a result of the settlement, the Company recognized a gain, net of expenses, of **$1,442,468** in the second quarter of 2023[74](index=74&type=chunk) [Note 9. Revolving Line of Credit and Notes Payable](index=23&type=section&id=Note%209.%20Revolving%20Line%20of%20Credit%20and%20Notes%20Payable) This note details the company's revolving line of credit and other notes payable, including terms and outstanding balances - The Company had a revolving line of credit with Summit Community Bank, which expired on August 16, 2023[75](index=75&type=chunk) - A new line of credit with Summit was entered on September 11, 2023, with a reduced maximum availability of **$500,000**, expiring on January 16, 2024[76](index=76&type=chunk) - A Premium Finance Agreement for **$305,759** at **8.75%** per annum was entered on March 7, 2023, to purchase a D&O insurance policy, requiring **ten** monthly payments of **$31,815**[78](index=78&type=chunk) [Note 10. Sales of Shares Under Common Stock Purchase Agreement](index=25&type=section&id=Note%2010.%20Sales%20of%20Shares%20Under%20Common%20Stock%20Purchase%20Agreement) This note describes the company's common stock purchase agreement and shares sold under the facility - On July 8, 2022, WaveDancer entered a Common Stock Purchase Agreement (ELOC) with B. Riley Principal Capital II, LLC, allowing the Company to sell up to **$15,000,000** of common stock at its option[79](index=79&type=chunk) - During the three months ended September 30, 2023, the Company sold **20,000 shares** under the ELOC for net proceeds of **$118,655**[81](index=81&type=chunk) - A commitment fee of **$150,000** in shares was issued to B. Riley, amortized to additional paid-in capital as shares are sold[80](index=80&type=chunk) [Note 11. Income Taxes](index=25&type=section&id=Note%2011.%20Income%20Taxes) This note provides information on the company's income tax position and effective tax rate - The Company's effective tax rate for the three and nine months ended September 30, 2022, was **0%**, primarily due to a full valuation allowance against all deferred tax assets[82](index=82&type=chunk) [Note 12. Earnings Per Share](index=25&type=section&id=Note%2012.%20Earnings%20Per%20Share) This note details the calculation of basic and diluted earnings per share for the reporting periods - Basic earnings (loss) per share is calculated by dividing loss available to common shareholders by the weighted-average shares outstanding[83](index=83&type=chunk) - Diluted earnings (loss) per share reflects potential dilution from securities, except when the Company reports a net loss, as inclusion would be antidilutive[83](index=83&type=chunk) - Antidilutive effects of stock options and warrants were excluded from diluted shares for both the three and nine months ended September 30, 2022[83](index=83&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on WaveDancer, Inc.'s financial condition and results of operations for the three and nine months ended September 30, 2023, compared to the prior year. It covers business overview, strategy, detailed analysis of revenues, gross profit, and operating expenses for both continuing and discontinued operations, critical accounting estimates, and liquidity and capital resources, highlighting the going concern uncertainty [Cautionary Statement Regarding Forward-Looking Statements](index=26&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements subject to risks and uncertainties, which could cause actual results to differ materially[85](index=85&type=chunk) - Key risks include operating losses, reliance on government contracts, intense competition, dependence on key employees and customer contracts, IT infrastructure risks, regulatory compliance, strategic investment risks, and the need for additional capital[85](index=85&type=chunk) [Our Business](index=27&type=section&id=Our%20Business) This section describes WaveDancer, Inc.'s core business activities, including IT systems development, modernization, and professional services for government and commercial clients - WaveDancer, Inc. (formerly Information Analysis Incorporated) specializes in developing and maintaining IT systems, modernizing client information systems, and providing IT professional services to government and commercial organizations[88](index=88&type=chunk) - Following the sale of its GMI subsidiary on March 17, 2023, and the subsequent sale of its remaining equity interest in GMDC on August 9, 2023, the Company now operates as a single reportable segment focused on continuing operations[89](index=89&type=chunk) - The Company's core competencies include legacy software migration and modernization (e.g., COBOL code), web-based and mobile solutions, data analytics, and is expanding into cybersecurity and cloud services, primarily for federal government agencies[90](index=90&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) [Our Strategy](index=28&type=section&id=Our%20Strategy) This section outlines WaveDancer's strategy for growth, focusing on organic expansion, acquisitions, and repositioning its professional services business - WaveDancer's strategy is to grow organically and through acquisitions, repositioning its legacy professional services business towards higher-margin professional services and away from third-party product reselling[96](index=96&type=chunk) - Organic growth focuses on bidding as a prime contractor on government proposals and expanding subcontracting opportunities with larger prime contractors[96](index=96&type=chunk) - The Company is actively pursuing strategic alternatives, including potential merger or sale, due to the need for additional capital to fund growth and ongoing operations[97](index=97&type=chunk) [Results of Continuing Operations – Three Months Ended September 30, 2023 and 2022](index=28&type=section&id=Results%20of%20Continuing%20Operations%20%E2%80%93%20Three%20Months%20Ended%20September%2030%2C%202023%20and%202022) This section analyzes the financial performance of continuing operations for the three months ended September 30, 2023, compared to the same period in 2022 | Metric | Q3 2023 | Q3 2022 | Change ($) | Change (%) | |:----------------------------------------|:--------------|:--------------|:--------------|:--------------| | Total Revenue | $ 1,967,277 | $ 2,306,379 | $ (339,102) | (14.7%) | | Professional Services Revenue | 1,921,300 | 2,114,012 | (192,712) | (9.1%) | | Gross Profit | 649,812 | 738,596 | (88,784) | (12.0%) | | Operating Income (Loss) | (516,845) | (1,130,118) | 613,273 | 54.3% | - The decrease in revenue was primarily due to a de-emphasis on third-party software sales (**2.3%** of Q3 2023 sales vs. **8.3%** in Q3 2022) and a decline in professional services revenue from one software modernization project[98](index=98&type=chunk) - Professional services gross profit as a percentage of revenue declined from **37.5%** to **35.8%** due to changes in contract mix and labor costs outpacing billing rate increases[99](index=99&type=chunk) | SG&A Expense Category | Q3 2023 | Q3 2022 | Change ($) | |:--------------------------------|:------------|:------------|:------------| | Salaries and benefits | $ 500,301 | $ 611,053 | $ (110,752) | | Stock based compensation | 180,816 | 398,319 | (217,503) | | Legal and professional fees | 84,671 | 444,547 | (359,876) | | Total SG&A | $ 1,166,657 | $ 1,868,714 | $ (702,057) | - The significant improvement in operating loss was primarily driven by a **$702,057** decrease in SG&A expenses, partially offset by the **$88,784** decrease in gross profit[101](index=101&type=chunk) [Results of Discontinued Operations – Three Months Ended September 30, 2023 and 2022](index=29&type=section&id=Results%20of%20Discontinued%20Operations%20%E2%80%93%20Three%20Months%20Ended%20September%2030%2C%202023%20and%202022) This section reports no activity for GMI in the third quarter of 2023 due to its sale, contrasting with prior year's discontinued operations - There was no activity for GMI in the third quarter of 2023 due to its sale on March 17, 2023[102](index=102&type=chunk) | Discontinued Operations (Q3 2022) | Amount | |:----------------------------------|:--------------| | Revenue | $ - | | Cost of revenue | 256,974 | | Gross profit | (256,974) | | Goodwill impairment | 2,254,624 | | Net income on discontinued operations | $ (3,530,152) | [Results of Continuing Operations – Nine Months Ended September 30, 2023 and 2022](index=29&type=section&id=Results%20of%20Continuing%20Operations%20%E2%80%93%20Nine%20Months%20Ended%20September%2030%2C%202023%20and%202022) This section analyzes the financial performance of continuing operations for the nine months ended September 30, 2023, compared to the same period in 2022 | Metric | 9M 2023 | 9M 2022 | Change ($) | Change (%) | |:----------------------------------------|:--------------|:--------------|:--------------|:--------------| | Total Revenue | $ 6,152,022 | $ 9,052,411 | $ (2,900,389) | (32.0%) | | Professional Services Revenue | 5,992,715 | 6,458,534 | (465,819) | (7.2%) | | Gross Profit | 2,011,623 | 2,338,907 | (327,284) | (14.0%) | | Operating Loss | (978,459) | (4,406,450) | 3,427,991 | 77.8% | - The revenue decrease was primarily due to a de-emphasis on third-party software sales (**2.6%** of 9M 2023 sales vs. **28.7%** in 9M 2022) and reduced resources on a software modernization project in Q2 and Q3 2023[103](index=103&type=chunk) - Professional services gross profit as a percentage of revenue slightly declined from **33.7%** to **33.6%** due to changes in contract mix and billing rates[104](index=104&type=chunk) | SG&A Expense Category | 9M 2023 | 9M 2022 | Change ($) | |:--------------------------------|:--------------|:--------------|:--------------| | Salaries and benefits | $ 1,595,216 | $ 2,022,252 | $ (427,036) | | Stock based compensation | 557,146 | 971,777 | (414,631) | | Legal and professional fees | 672,582 | 1,467,736 | (795,154) | | Acquisition costs | 512,975 | 829,478 | (316,503) | | Total SG&A | $ 4,432,550 | $ 6,745,357 | $ (2,312,807) | - The significant reduction in operating loss was primarily due to a **$1,442,468** gain on litigation settlement and a **$2,312,807** decrease in SG&A expenses, partially offset by the **$327,284** decrease in gross profit[107](index=107&type=chunk) [Results of Discontinued Operations – Nine Months Ended September 30, 2023 and 2022](index=30&type=section&id=Results%20of%20Discontinued%20Operations%20%E2%80%93%20Nine%20Months%20Ended%20September%2030%2C%202023%20and%202022) This section details the financial results of discontinued operations for the nine months ended September 30, 2023, reflecting reduced activity compared to the prior year - Discontinued operations for the nine months ended September 30, 2023, reflect approximately two fewer weeks of costs and expenses for GMI compared to 2022, with no activity in Q2 and Q3 2023[108](index=108&type=chunk) | Discontinued Operations (9M) | 2023 | 2022 | Change ($) | |:-----------------------------|:--------------|:--------------|:--------------| | Revenue | $ - | $ 566,862 | $ (566,862) | | Cost revenue | 74,223 | 1,118,301 | (1,044,078) | | Gross profit | (74,223) | (551,439) | 477,216 | | Goodwill impairment | - | 2,254,624 | (2,254,624) | | Gain on disposal of business | (100,615) | - | (100,615) | | Net income (loss) on discontinued operations | $ (335,993) | $ (3,052,648) | $ 2,716,655 | [Critical Accounting Estimates](index=30&type=section&id=Critical%20Accounting%20Estimates) This section discusses the company's critical accounting estimates, including new fair value measures related to the GMI sale - No material changes to critical accounting estimates were reported, except for two new fair value measures in Q1 2023: the contingent consideration receivable from GMDC and the initial fair value of the equity method investment in GMDC[112](index=112&type=chunk) - The fair value of contingent consideration is a recurring Level 3 measurement, involving significant unobservable judgmental inputs, where changes in assumptions could materially impact reported fair value[113](index=113&type=chunk) - The initial fair value of the equity method investment in GMDC was determined using an Option Pricing Model Backsolve method, with inputs including an estimated time to exit of **four years**, **75.0%** volatility, **4.29%** risk-free rate, and a **23.5%** minority interest discount[114](index=114&type=chunk) [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses WaveDancer's liquidity and capital resources, highlighting its net loss, cash needs, and going concern uncertainty | Liquidity Metric (as of Sep 30, 2023) | Amount | |:--------------------------------------|:------------| | Net working capital | $ 537,375 | | Cash and cash equivalents | $ 877,198 | | Outstanding line of credit | $ 500,000 | - The Company generated a net loss from continuing operations of **$929,106** for the nine months ended September 30, 2023[115](index=115&type=chunk) - WaveDancer anticipates using **$1.0 million** to **$1.5 million** in cash from operating activities over the next twelve months and needs to raise additional capital to meet ongoing operating cash flow requirements and fund growth, creating substantial doubt about its ability to continue as a going concern[116](index=116&type=chunk)[117](index=117&type=chunk) - On August 9, 2023, the Company received **$1,400,000** cash from GMDC from the sale of common stock and settlement of contingent consideration, and subsequently repaid **$500,000** on its Summit line of credit, which now has no further borrowing capacity[118](index=118&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the Company's disclosure controls and procedures, confirming their effectiveness as of September 30, 2023. It also states that there were no material changes in internal controls over financial reporting during the quarter and acknowledges the inherent limitations of all control systems - Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2023, concluding they are effective[120](index=120&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[121](index=121&type=chunk) - The Company acknowledges inherent limitations in control systems, where judgments can be faulty, breakdowns can occur due to error, or controls can be circumvented by individual acts, collusion, or management override[122](index=122&type=chunk) PART II. OTHER INFORMATION This part provides additional information on legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) This section states that WaveDancer, Inc. is not currently a party to any pending legal proceedings, nor is it aware of any contemplated or threatened actions against it - There are no pending legal proceedings to which WaveDancer, Inc. is a party or to which any of its property is subject[124](index=124&type=chunk) - To the best of the Company's knowledge, no such actions are contemplated or threatened[124](index=124&type=chunk) [Item 1A. Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors discussed in the Company's annual report on Form 10-K for the year ended December 31, 2022, and confirms that there have been no material changes to these risks - No material changes have occurred from the risk factors described in the Company's annual report on Form 10-K for the year ended December 31, 2022[125](index=125&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=34&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports an unregistered sale of common stock by the Company, detailing the number of shares, price, gross proceeds, and the rule under which the sale was conducted - On September 27, 2023, the Company sold **35,000 shares** of common stock at **$5.00 per share** in a private offering, raising aggregate gross proceeds of **$175,000**[125](index=125&type=chunk) - The Company relied on Rule 506(b) of Regulation D for this issuance, and no placement fees or commissions were paid[125](index=125&type=chunk) - The proceeds are designated for general corporate purposes[125](index=125&type=chunk) [Item 3. Defaults Upon Senior Securities](index=34&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section confirms no reportable events regarding defaults on senior securities [Item 4. Mine Safety Disclosures](index=34&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section confirms no reportable events regarding mine safety disclosures [Item 5. Other Information](index=34&type=section&id=Item%205.%20Other%20Information) This section confirms no other material information to report [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, certifications pursuant to the Sarbanes-Oxley Act, and various Inline XBRL documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934[126](index=126&type=chunk) - Certifications pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, are also filed[126](index=126&type=chunk) - Various Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbases, and Cover Page Interactive Data File) are included as exhibits[126](index=126&type=chunk) SIGNATURES This section contains the official signatures of the company's executive officers affirming the report submission [SIGNATURES](index=36&type=section&id=SIGNATURES) This section contains the official signatures of WaveDancer, Inc.'s Chief Executive Officer, G. James Benoit, Jr., and Chief Financial Officer, Timothy G. Hannon, affirming the submission of the Form 10-Q report on November 13, 2023 - The report was signed on behalf of WaveDancer, Inc. by G. James Benoit, Jr., Chief Executive Officer, and Timothy G. Hannon, Chief Financial Officer[129](index=129&type=chunk) - The signing date for the report was November 13, 2023[129](index=129&type=chunk)

PART I. FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The unaudited condensed consolidated financial statements for Q2 2023 reflect decreased assets and equity, a $235,000 net income from continuing operations, driven by a $1.44 million litigation settlement gain, despite declining revenues [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2023, total assets decreased to $6.25 million from $7.98 million, primarily due to the disposal of assets held for sale, leading to a decline in cash and stockholders' equity Balance Sheet Comparison (in thousands) | Account | June 30, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | **Assets** | | | | | Cash and cash equivalents | $338.3 | $731.1 | -$392.8 | | Total current assets | $2,599.1 | $2,803.1 | -$204.0 | | Assets held for sale | $0.0 | $2,316.8 | -$2,316.8 | | Total assets | $6,247.3 | $7,981.2 | -$1,733.9 | | **Liabilities & Equity** | | | | | Revolving line of credit | $1,000.0 | $425.0 | +$575.0 | | Deferred acquisition consideration | $0.0 | $1,415.1 | -$1,415.1 | | Total liabilities | $3,629.7 | $4,251.3 | -$621.6 | | Total stockholders' equity | $2,617.6 | $3,729.9 | -$1,112.3 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q2 2023 total revenues decreased 46% to $2.02 million due to lower software sales, yet operating income improved to $493,116 from a $1.6 million loss, driven by a $1.44 million litigation settlement gain, narrowing the H1 net loss Q2 2023 vs Q2 2022 (Three Months Ended June 30) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $2,024,622 | $3,750,520 | -46.0% | | - Software Sales | $56,665 | $1,472,688 | -96.1% | | Gross Profit | $705,013 | $903,841 | -22.0% | | Gain on settlement of litigation | $1,442,468 | $0 | N/A | | Operating Income (Loss) | $493,116 | ($1,599,270) | +$2,092,386 | | Net Income (Loss) | $234,785 | ($1,525,442) | +$1,760,227 | | Diluted EPS | $0.01 | ($0.09) | +$0.10 | H1 2023 vs H1 2022 (Six Months Ended June 30) | Metric | H1 2023 | H1 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $4,184,745 | $6,746,032 | -38.0% | | Gross Profit | $1,361,811 | $1,600,311 | -14.9% | | Operating Loss | ($461,614) | ($3,276,332) | +85.9% | | Net Loss | ($1,115,167) | ($3,603,749) | +69.1% | | Diluted EPS | ($0.06) | ($0.21) | +$0.15 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For H1 2023, net cash used in operating activities improved to $2.15 million, with investing activities providing $936,000 and financing activities $825,000, resulting in a $392,781 decrease in cash, ending at $338,300 Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($2,153,536) | ($4,356,478) | | Net cash provided by (used in) investing activities | $935,974 | ($31,033) | | Net cash provided by financing activities | $824,781 | $35,191 | | **Net decrease in cash** | **($392,781)** | **($4,352,320)** | | **Cash at end of period** | **$338,300** | **$578,982** | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes include the GMI subsidiary sale as a discontinued operation, substantial doubt about going concern requiring capital by Q2 2024, a $1.44 million litigation settlement gain, and a post-quarter $1.4 million cash infusion from GMDC interest sale - The company has **substantial doubt** about its ability to continue as a going concern, estimating a need for **additional capital by Q2 2024** to meet ongoing operating cash flow requirements[25](index=25&type=chunk)[123](index=123&type=chunk) - On March 17, 2023, the company sold **75.1% of its GMI subsidiary** to GMDC, resulting in deconsolidation and treatment as a discontinued operation, with consideration including cash, stock, and contingent payments[23](index=23&type=chunk)[40](index=40&type=chunk) - On April 28, 2023, litigation with GMI's former owner was settled, extinguishing a **$1.5 million deferred consideration liability** and resulting in a **net gain of $1,442,468**[79](index=79&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - Subsequent to quarter-end, on August 9, 2023, the company sold its remaining equity interest in GMDC for **$1.4 million in cash**, expecting a recognized gain of approximately **$382,525**[90](index=90&type=chunk)[91](index=91&type=chunk)[92](index=92&type=chunk) - The company has a high concentration of revenue from U.S. government contracts, with **one prime contractor accounting for 55.1% of total revenue** for Q2 2023[33](index=33&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the 46% Q2 2023 revenue decline to strategic software de-emphasis, with operating income improving due to a $1.44 million litigation gain and reduced SG&A, while acknowledging going concern doubts, mitigated by a post-quarter $1.4 million cash infusion [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Q2 2023 revenue declined by $1.73 million (46%) due to reduced software sales, but operating income improved by $2.1 million to $493,000, driven by a $1.44 million litigation gain and $849,000 SG&A reduction, narrowing the H1 operating loss - The revenue decrease for Q2 and H1 2023 was primarily due to the company's de-emphasis of third-party software sales, which fell from **39.3% of revenue in Q2 2022 to 2.8% in Q2 2023**[106](index=106&type=chunk)[112](index=112&type=chunk) - Operating income for Q2 2023 improved by **$2.1 million** year-over-year, primarily due to a **$1.44 million gain on litigation settlement** and an **$849,000 decrease in SG&A expenses**[109](index=109&type=chunk) SG&A Expense Breakdown (Three Months Ended June 30) | Expense Category | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Salaries and benefits | $528,573 | $765,710 | ($237,137) | | Stock based compensation | $88,159 | $343,492 | ($255,333) | | Legal and professional fees | $343,042 | $424,866 | ($81,824) | | **Total SG&A** | **$1,654,365** | **$2,503,111** | **($848,746)** | [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2023, the company had a $780,357 working capital deficit and $338,300 cash, raising substantial doubt about its going concern, though a subsequent $1.4 million cash infusion from GMDC sale improved liquidity - The company had a working capital deficit of **$780,357** and cash of **$338,300** as of June 30, 2023[122](index=122&type=chunk) - Management states there is **substantial doubt** about the company's ability to continue as a going concern, estimating a need to raise **capital by Q1 2024**[123](index=123&type=chunk) - On August 9, 2023, the company received **$1.4 million in cash** from the sale of its GMDC common stock and subsequently repaid **$500,000** on its line of credit[124](index=124&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of June 30, 2023, the company's **disclosure controls and procedures are effective**[125](index=125&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[126](index=126&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) A lawsuit filed by Jeffrey Gerald concerning severance and deferred consideration from the GMI acquisition was fully settled on April 28, 2023, with no other pending legal proceedings reported - A lawsuit filed by Jeffrey Gerald regarding severance pay and deferred consideration from the GMI acquisition was **settled on April 28, 2023**[130](index=130&type=chunk)[131](index=131&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K have occurred - There have been **no material changes** to the risk factors disclosed in the company's 2022 Form 10-K[133](index=133&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[133](index=133&type=chunk)

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) Unaudited Q1 2023 financial statements detail the GMI subsidiary sale, a **$1.35 million** net loss, and liquidity issues raising going concern doubts [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to **$7.29 million** and liabilities increased to **$4.92 million** by March 31, 2023, driven by the GMI sale and increased borrowings, reducing equity Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2023 ($) | December 31, 2022 ($) | | :--- | :--- | :--- | | **Total Assets** | **$7,290,035** | **$7,981,214** | | Cash and cash equivalents | $814,722 | $731,081 | | Assets held for sale | $0 | $2,316,845 | | **Total Liabilities** | **$4,918,717** | **$4,251,311** | | Revolving line of credit | $1,000,000 | $425,000 | | **Total Stockholders' Equity** | **$2,371,318** | **$3,729,903** | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Total revenues decreased by **27.9%** to **$2.16 million** in Q1 2023, primarily due to lower software sales, while the net loss narrowed to **$1.35 million** Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended March 31, 2023 ($) | Three Months Ended March 31, 2022 ($) | | :--- | :--- | :--- | | Total Revenues | $2,160,123 | $2,995,512 | | Gross Profit | $656,798 | $696,470 | | Operating loss from continuing operations | $(954,730) | $(1,677,062) | | Net loss from continuing operations | $(1,013,959) | $(2,159,360) | | Net loss | $(1,349,952) | $(2,078,308) | | Basic and diluted loss per share | $(0.07) | $(0.12) | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities was **$1.76 million** in Q1 2023, offset by cash from investing activities (GMI disposal) and financing, resulting in a net cash increase of **$83,641** Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended March 31, 2023 ($) | Three Months Ended March 31, 2022 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,764,359) | $(1,947,128) | | Net cash provided by (used in) investing activities | $935,974 | $(11,773) | | Net cash provided by financing activities | $912,026 | $26,799 | | **Net increase (decrease) in cash** | **$83,641** | **$(1,932,102)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes provide critical context on the GMI subsidiary sale, the company's liquidity issues raising 'going concern' doubts, revenue concentration, and a significant post-quarter litigation settlement - The company's financial condition has raised substantial doubt about its ability to continue as a going concern, anticipating a need to raise additional capital by the end of 2023 to meet operating cash flow requirements[19](index=19&type=chunk) - On March 17, 2023, the company sold its Gray Matters, Inc. (GMI) subsidiary, receiving cash, a **24.9%** equity interest in the purchaser (GMDC), and contingent future payments, with GMI's results now reported as discontinued operations[17](index=17&type=chunk)[32](index=32&type=chunk) - Revenue from U.S. government contracts and subcontracts constituted **96.6%** of total revenue for the quarter, with revenue from one prime contractor representing **50.9%** of total revenue, indicating significant customer concentration[27](index=27&type=chunk) - Subsequent to the quarter's end, on April 28, 2023, the company settled litigation with Jeffrey Gerald, extinguishing a **$1.5 million** deferred consideration obligation related to the GMI acquisition, which is expected to result in a gain of approximately **$1.41 million** in Q2 2023[81](index=81&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's strategic shift towards higher-margin professional services, Q1 2023 financial results, and severe liquidity constraints raising substantial doubt about its going concern ability [Our Business and Strategy](index=24&type=section&id=Our%20Business%20and%20Strategy) The company provides IT services primarily to U.S. government agencies, focusing on organic and acquisition-driven growth, with a strategic shift towards higher-margin professional services over third-party product reselling - The company's strategy is to grow business organically and through acquisitions, with a focus on professional services over third-party product reselling[93](index=93&type=chunk) - WaveDancer's core competencies include legacy software migration, web-based and mobile solutions, data analytics, and developing cybersecurity and cloud services practices[88](index=88&type=chunk) [Results of Continuing Operations](index=24&type=section&id=Results%20of%20Continuing%20Operations) Q1 2023 revenue from continuing operations fell **27.9%** to **$2.16 million** due to a strategic decline in software sales, while professional services revenue grew **1.8%**, and the operating loss improved **43.1%** due to reduced SG&A expenses Revenue and Gross Profit Comparison (Q1 2023 vs Q1 2022) | Metric | Q1 2023 ($) | Q1 2022 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $2,160,123 | $2,995,512 | -27.9% | | Professional Services Revenue | $2,103,458 | $2,066,690 | +1.8% | | Gross Profit | $656,798 | $696,470 | -5.7% | - The operating loss from continuing operations decreased by **$722,332** (**43.1%**) to **$954,730**, primarily due to a **$762,004** reduction in SG&A expenses[97](index=97&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) The company faces critical liquidity challenges with net working capital of only **$97,217**, necessitating additional capital by Q4 2023 and raising substantial doubt about its ability to continue as a going concern - The company had net working capital of **$97,217** and cash of **$814,722** as of March 31, 2023[103](index=103&type=chunk) - Management estimates that by Q4 2023, additional capital will be needed to fund operations, and it is exploring strategic alternatives like a merger or sale, which raises substantial doubt about its ability to continue as a going concern[104](index=104&type=chunk) - A **$1,435,576** deferred acquisition consideration liability was extinguished after the quarter ended due to a litigation settlement, which will improve the company's financial position in Q2 2023[105](index=105&type=chunk) [Item 4. Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the evaluation date, March 31, 2023[106](index=106&type=chunk) - No material changes to the company's internal control over financial reporting were identified during the first quarter of 2023[107](index=107&type=chunk) [PART II. OTHER INFORMATION](index=29&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) This section discloses a lawsuit filed by Jeffrey Gerald concerning severance and deferred acquisition consideration, which was settled on April 28, 2023, with no other significant legal proceedings pending - A lawsuit was filed by Jeffrey Gerald regarding severance and deferred consideration related to the GMI acquisition[110](index=110&type=chunk) - The litigation with Jeffrey Gerald was settled on April 28, 2023, with terms detailed in Note 12 of the financial statements[111](index=111&type=chunk) [Item 1A. Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company states that there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors described in the company's 2022 annual report on Form 10-K[113](index=113&type=chunk) [Other Items (2, 3, 4, 5)](index=30&type=section&id=Other%20Items%20%282%2C%203%2C%204%2C%205%29) The company reported no unregistered sales of equity securities, no defaults upon senior securities, and no other material information to disclose, with Mine Safety Disclosures being not applicable - The company reported 'None' for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), and Item 5 (Other Information), while Item 4 (Mine Safety Disclosures) was 'Not applicable'[113](index=113&type=chunk)[114](index=114&type=chunk) [Item 6. Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the Settlement Agreement with Jeffrey Gerald, the Stock Purchase Agreement for the GMI sale, and various officer certifications - A list of exhibits filed with the report is provided, including key agreements and required CEO/CFO certifications[115](index=115&type=chunk)[116](index=116&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-41092 WAVEDANCER WAVEDANCER, INC. (Exact name of registrant as specified in its charter) Delaware 54-1167364 State or other jurisdic ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 Or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-41092 WaveDancer, Inc. (Exact name of registrant as specified in its charter) Delaware 54-1167364 (State or other jurisdiction of incorporation or organization) (I.R.S. Emplo ...

Securities registered pursuant to Section 12(b) of the Act: | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | --- | --- | --- | | Common Stock, par value $0.001 per | WAVD | The Nasdaq Stock Market LLC | | share | | | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file ...