Firefly Neuroscience, Inc.(AIFF) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements 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 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 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 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 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] - 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][32] - 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] - 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][82][83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - WaveDancer's core competencies include legacy software migration, web-based and mobile solutions, data analytics, and developing cybersecurity and cloud services practices[88] Results of Continuing Operations 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] Liquidity and Capital Resources 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] - 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] - 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] Item 4. Controls and Procedures 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] - No material changes to the company's internal control over financial reporting were identified during the first quarter of 2023[107] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] - The litigation with Jeffrey Gerald was settled on April 28, 2023, with terms detailed in Note 12 of the financial statements[111] Item 1A. Risk Factors 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] Other Items (2, 3, 4, 5) 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][114] Item 6. Exhibits 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][116]