WAVEDANCER INC

Note1. Summary of Significant Accounting Policies

Organization and Business

Founded in1979 as Information Analysis Incorporated (“IAI”), IAI changed its name to WaveDancer, Inc. (“WaveDancer” or the “Company”) and converted from a Virginia corporation to a Delaware corporation in* December 2021.*The Company is in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.

On* March 17, 2023,the Company sold effectively 75.1% of the equity of its Gray Matters, Inc. subsidiary (“GMI”) to Gray Matters Data Corporation (“GMDC”). Subsequent to the sale, the Company discontinued consolidating GMI and the Company has reflected GMI as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements for2023* and2022 relate to the Company’s continuing operations, except Note2, which relates to the discontinue operations and corresponding assets and liabilities held for sale of GMI. See Note2 for further information about the sale transaction of GMI, the deconsolidation of GMI, and treatment of GMI as a discontinued operation.

Prior to* March 17,2023, we hadtwo operating segments: Tellenger, the business unit that comprises all of our current products and services, and Blockchain SCM. Given the classification of GMI, which comprised all of the material operations of the Blockchain SCM segment, as a discontinued operation (see Note2) as of March 17, 2023,*the Company manages its business asone reportable operating segment.

Liquidity and Going Concern

During the year ended* December 31, 2023,the Company used cash from operations, excluding discontinued operations, of $2,121,462 and as of December 31, 2023,had a net working capital deficit of $31,098, including cash and cash equivalents of $681,995. As of December 31, 2023,the Company hadno* borrowing availability under its bank line of credit. On* November**15,* 2023, the Company and its wholly owned subsidiary, FFN, Inc.(“FFN”), entered into an Agreement and Plan of Merger (“Merger Agreement”) with Firefly Neuroscience, Inc. (“Firefly”). FFN was incorporated solely for the purpose of entering into the Merger Agreement. In accordance with the Merger Agreement, FFN will merge into Firefly which will become a wholly owned subsidiary of WaveDancer, WaveDancer will change its name to Firefly Neuroscience, Inc., and the Firefly shares will be converted into WaveDancer shares (the “Merger”). The board of directors of Firefly after the Merger will consist offive members,one of whom will be designated by WaveDancer. As a condition of the Merger Agreement, on* November 15, 2023,the Company also entered into a Stock Purchase Agreement with Wavetop Solutions, Inc.(“Wavetop”), a company owned and controlled by WaveDancer's chairman and chief executive officer, to sell all of the outstanding shares of Tellenger, Inc. to Wavetop for $1.5 million of cash. Tellenger is the entity through which the Company operates its day-to-day business. On March 14, 2024,*the Company convened a special meeting of its shareholders and received the shareholder approvals required to close the Merger. Firefly has obtained the necessary consent from its shareholders for the Merger.

The Merger Agreement requires that WaveDancer has sufficient cash on hand on the closing date to pay all its outstanding liabilities on that date including transactions fees and expenses as well as severance costs for employees that will be terminated as a result of the merger. The Company will have to raise approximately $0.8 to $1.1 million to satisfy its obligations on the closing date. In addition, Firefly has conditions it must satisfy in order for the Merger to close, including approval by Nasdaq Capital Markets LLC of its initial listing application. In order to have its listing application approved by Nasdaq, Firefly will need to raise approximately $6 million of equity as of the closing of the Merger. There isno assurance that the Company will successfully raise the capital it needs to close the Merger with Firefly, nor that all the other conditions precedent to the Merger closing will be satisfied, which creates substantial doubt about the Company’s ability to continue as a going concern for at leastone year from the date that the accompanying consolidated financial statements are issued. If the Merger doesnot close, the Company will need to raise additional capital and reduce its operating expenses to meet its ongoing cash flow requirements and there isno assurance that such efforts would be successful.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company’s consolidated financial statements donot include any adjustment that might result from the outcome of this uncertainty.

Reverse Stock Split

On* October 18, 2023,the Company effected a reverse stock split of its common stock, par value $0.001 per share, (the “Common Stock”) at a ratio ofone*-for-ten (the “Reverse Stock Split”). The Reverse Stock split affected all issued common stock and options and warrants to acquire common stock.No fractional shares were issued as a result of the reverse split and any fractional share otherwise issuable were rounded up to the nearest whole number. All shares and per share amounts in the consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Reverse Stock Split. Following the Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 19,809,834 pre-split shares to 2,013,180 post-split shares, after finalizing the rounding of fractional shares. As a result of the Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of ten.

Basis of Presentation and Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding annual financial reporting. The accompanying consolidated financial statements include the accounts of WaveDancer, Inc. and its consolidated subsidiaries (collectively, the “Company”, “we” or “our”). All significant intercompany balances and transactions have been eliminated in consolidation.

F-8

Use of Estimates

Preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; fair values of financial instruments, reporting units, intangible assets, and goodwill; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, the valuation of deferred tax assets and liabilities; and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, and the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

See Note3 for a detailed description of our revenue recognition policy.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities ofninety days or less at the time of purchase to be cash equivalents. Deposits are maintained with a federally insured bank. Balances at times exceed federally insured limits, but management doesnot consider this to be a significant concentration of credit risk.

Accounts Receivable

Our payment terms for accounts receivable vary by the types of our customers and the products or services offered. Typically, we invoice for services on a monthly basis, and we invoice for product sales upon delivery.

We maintain an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable, and changes in such are classified as general and administrative expense in the consolidated statements of operations. We assess collectability on an individual customer basis. In determining the amount of the allowance for credit losses, we consider historical collectability based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. Our allowance for doubtful accounts as of* December 31, 2023and2022* was immaterial.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over the lesser of the useful life orfive years, purchased software is depreciated over the lesser ofthree years or the term of the license, and computer equipment is depreciated over three years. Leasehold improvements are amortized over the estimated term of the lease or the estimated life of the improvement, whichever is shorter. Maintenance and minor repairs are charged to operations as incurred. Gains and losses on dispositions are recorded in operations. See Note7.

Stock-Based Compensation

The Company’s stock-based compensation plans as of* December 31, 2023are described in Note13* below. Total compensation expense related to these plans was $710,550 and $1,276,455 for the years ended* December 31, 2023and2022,* respectively, and is included in selling, general and administrative expenses on the consolidated statements of operations. Stock-based compensation expense for discontinued operations, excluding the effect of option forfeitures, was $65,487 and $691,472 for the years ended* December 31, 2023and2022,* respectively. The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense. When stock-based compensation is awarded, the expense is recognized ratably over the requisite service period. The Company recognizes forfeitures at the time the forfeiture occurs.

Equity Method Investments

The Company accounts for investments in which it owns between20% to50% of the common stock or has the ability to exercise significant influence, butnot control, over the investee using the equity method of accounting in accordance with ASC323 -Equity Method Investments and Joint Ventures (“ASC323”). Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The Company reflects its share of gains and losses from the investment in equity in net loss of affiliate in the consolidated statements of operations using the most recently available earnings data at the end of the period.

In connection with the sale of GMI to GMDC on* March 17, 2023, (the "Sale Date"), the Company received common stock in GMDC representing approximately 24.9% of the equity of GMDC. On August 9, 2023the Company sold all of its GMDC common stock. During the period from March 18through August 9, 2023,the Company accounted for its investment in GMDC in accordance with the equity method and, during that period, recognized $245,525 as its share of GMDC’s net loss. See Note2* for information about the GMI sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation.

Income Taxes

Deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. The Company expects that recent tax law changes contained in the Inflation Reduction Act and CHIPS Act willnot have a material impact on its provision for income taxes. In addition, a valuation allowance is required to be recognized if it is believed more likely thannot that a deferred tax asset willnot be fully realized. Authoritative guidance prescribes a recognition threshold of more likely thannot, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements. The Company continually reviews tax laws, regulations and related guidance in order to properly record any uncertain tax liabilities. See Note11.

Loss Per Share

The Company’s loss per share calculation is based upon the weighted average number of shares of common stock outstanding. The dilutive effect of stock options, warrants, and other equity instruments are included for purposes of calculating diluted income per share, except for periods when the Company reports a net loss, in which case the inclusion of such equity instruments would be antidilutive. See Note16.

F-9

Concentration of Credit Risk

During the year ended* December 31, 2023,the Company’s prime contracts with U.S. government agencies represented 8.8% of revenue and subcontracts under federal procurements represented 89.7% of revenue. The terms of these contracts and subcontracts vary from single transactions tofive* years. Three subcontracts under federal procurements represented 29.9%,20.5% and 17.7% of revenue, respectively. Revenue fromone prime contractor under which the Company has multiple subcontracts represented 55.4% of the Company’s revenue in aggregate.

During the year ended* December 31, 2022,the Company’s prime contracts with U.S. government agencies represented 25.1% of revenue and subcontracts under federal procurements represented 71.3% of revenue. The terms of these contracts and subcontracts vary from single transactions tofive* years. Three subcontracts under federal procurements represented 28.4%,17.2% and 11.2% of revenue, respectively. Revenue fromone prime contractor under which the Company has multiple subcontracts represented 43.6% of the Company’s revenue in aggregate.

The Company soldthird-party software and maintenance contracts under agreements withone major supplier in2023 and2022, accounting for 2.4% and 24.3% of total revenue, respectively.

As of* December 31, 2023,*the Company’s accounts receivable included receivables fromtwo subcontracts under federal procurements that represented 30.2% and 29.3% of the Company’s outstanding accounts receivable, respectively. Receivables fromone prime contractor under which the Company has multiple subcontracts represented 70.1% of the Company’s outstanding accounts receivable in aggregate.

As of* December 31, 2022,*the Company’s accounts receivable included receivables fromone prime contract andone subcontract under federal procurements that represented 26.5% and 25.8% of the Company’s outstanding accounts receivable, respectively. Receivables fromone prime contractor under which the Company has multiple subcontracts represented 39.2% of the Company’s outstanding accounts receivable in aggregate.

Intangibles and Goodwill

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic350, Goodwill – Intangibles and Other (“ASC350”) and has concluded that it hasone operating segment andone reporting unit for purposes of goodwill impairment testing. Goodwill isnot amortized but instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that it is more likely thannot that the fair value of a reporting unit* maybe below its carrying value. These circumstances include, but arenot* limited to, significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s planned revenue or earnings. Management evaluates the recoverability of the Company’s goodwill annually on* October 31*or more often as events or circumstances indicate the fair value of a reporting unit is below its carrying value, including goodwill. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the reporting unit carrying amount exceeds the estimated fair value of the reporting unit.

Management evaluates the recoverability of the Company’s indefinite-lived intangible assets (tradenames) annually on* October**31,* or more often when events or circumstances indicate a potential impairment exists.

Management evaluates the recoverability of the Company’s finite-lived intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets or asset groups that contain those assets. If impairment is indicated based on a comparison of an asset group’s carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

Recently Issued Accounting Pronouncements

In* November 2023,the Financial Accounting Standards Board issued Accounting Standards Update (ASU)2023-07, Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures.* The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU2023-07 are also required for public entities with a single reportable segment. The ASU is effective for the Company’s Annual Report on Form10-K for the fiscal year ended* December 31, 2024,*and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements and disclosures and expects that it will result in additional disclosures.

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Note2. Sale and Deconsolidation of GMI and Discontinued Operations

On* March 17, 2023,the Company entered into and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC ("StealthPoint"), a San Francisco based venture fund, under which the Company sold all of the shares of its subsidiary, Gray Matters, Inc. In exchange for this sale, the Company received common shares of GMDC representing on a primary share basis, assuming the conversion of the Series A preferred stock referenced below,24.9% interest in the purchaser, cash consideration of $935,974 and contingent annual payments equal tofive* percent (5%) of the purchaser’s GAAP based revenue through* December 31, 2029attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. GMDC also paid the Company $133,148 for certain of GMI’s operating expenses for the period beginning March 1, 2023through March 17, 2023.*

The equity interest StealthPoint and other GMDC investors received was in the form of Series A non-participating convertible preferred stock having aone-times (1x) liquidation preference andno cumulative dividends. In addition, the Company and GMDC entered into a transition services agreement whereby the Company continued to provide certain administrative services for GMI. The value of these services was determined to be $65,000 which was paid by GMDC at closing and wasnot subject to adjustment. The $65,000 prepayment was recognized as a reduction to selling, general and administrative expenses ratably over thethree-month period ended* June 30, 2023after which timeno* further transition services were provided. The total cash received at closing was $1,000,974. The Company also had the right to appoint a representative to GMDC’s board of directors and a right to co-invest in future GMDC preferred stock financing rounds. The Company recognized a gain on the sale of GMI of $100,615 in2023, which is included in net loss on discontinued operations in the condensed consolidated statement of operations. We deconsolidated GMI immediately upon its sale. GMDC wasnot a related party of the Company at the time of its purchase of GMI. Subsequent to our deconsolidation of GMI, and until our sale of GMDC common stock on* August 9, 2023,*GMI and GMDC were related parties of the Company due to our equity interest in GMDC.

The components of the consideration received and the methods for determining their fair values as of* March 17, 2023*were as follows:

The GMDC common stock was accounted for as an equity method investment from* March 17, 2023,and through its sale on August 9, 2023.During this period, a net loss of $245,525 in the equity investment was recorded. On August 9, 2023,the Company sold its remaining equity interest in GMDC in exchange for $400,000 in cash, and recognized a gain on sale of $64,525. The contingent consideration receivable of $682,000 was settled in cash for $1,000,000 and a gain of $318,000 was recognized in thethird* quarter of2023.

The following table sets forth details of net earnings from discontinued operations for the years ended* December 31, 2023and2022,* which reflects the results of our former Blockchain SCM operating segment through the date our controlling financial interest in it was sold –* March 17, 2023.*

During the year ended* December 31, 2023,there was a total of 715,000 unvested stock options forfeited by GMI employees, including 527,500 forfeited by employees who resigned from WaveDancer, on the Sale Date, and were offered employment by GMDC. Stock-based compensation expense of $407,322, previously recognized for these forfeited options, was taken back into income in2023.*

The income tax benefit is at an effective rate different from the federal statutory rate due principally to the following:

F-11

The following table presents the components of the assets of our discontinued operations that are classified as held for sale as of* December 31, 2022.As of December 31, 2023,*GMI had been sold and its accounts deconsolidated from the condensed consolidated balance sheet.

Note3. Revenue from Contracts with Customers

Revenue is recognized when all the following steps have been taken and criteria met for each contract:

Nature of Products and Services

We generate revenue from the sales of information technology professional services, sales ofthird-party software licenses and implementation and training services, sales ofthird-party support and maintenance contracts based on those software products, and incentive payments received fromthird-party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. We sell through our direct relationships with end customers and under subcontractor arrangements.

Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts. Revenue under time and materials arrangements is recognized over time in the period the hours are worked or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units has occurred and units are accepted by the customer or are reasonably expected to be accepted. Generally, revenue under fixed-price arrangements and mixed arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer. For fixed-price arrangements under which documentary evidence of acceptance or receipt of deliverables isnot present or withheld by the customer, the Company recognizes revenue when it has the right to invoice the customer. For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, withno predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time.

Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses. The Company’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. Revenue for bulk desktop software licenses for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. For desktop software licenses sold on an individual license basis to non-government customers, where the Company hasno obligation to the customer after thethird-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs.

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Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be thefirst line of support (direct support) andsecond line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support isnot estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.

Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.

Disaggregation of Revenue from Contracts with Customers

Contract Balances

Contract Liabilities

Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that havenot been recognized as revenue because the related goods or services havenot been transferred. Changes in contract liabilities balances in2023 and2022 are as follows:

Revenue recognized during2023 from the balance as of* December 31, 2022was $159,307 and revenue recognized during2022* from the balance as of* December 31, 2021*was $160,809.

Costs to Obtain or Fulfill a Contract

When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it wouldnot have incurred those costs if the contract hadnot been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There wereno such assets as of* December 31, 2023,and2022.* When incurred, these costs are amortized ratably over the expected life of the customer.

Deferred Costs of Revenue

Deferred costs of revenue consist of the costs ofthird-party support and maintenance contracts for enterprise server-based software, as well direct costs associated with contract deliverables for which control of the work product hasnot passed to the customer and contract revenue hasnot been recognized. These costs are reported under the prepaid expenses and other current assets caption on the Company’s consolidated balance sheets. The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue. Changes in deferred costs of revenue balances during2023 and2022 are as follows:

F-13

Note4. Leases

The Company hastwo significant operating leases,one for its headquarters offices in Fairfax, Virginia andone for additional office space in Annapolis, Maryland. The leases both commenced in2021 and have original lease terms ranging from 37 to 67 months and rental rates escalate by approximately 2.5% annually under both leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company’s consolidated balance sheets as of* December 31, 2023and2022.*

As of* December 31, 2023and2022,* the Company doesnot have any sales-type or direct financing leases.

The Company’s operating lease asset represents its right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the lease doesnot provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreement includes rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liability and operating lease asset. The Company doesnot have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.

The Company’s lease agreements donot contain any material residual value guarantees or material restrictions or covenants.

The Company doesnot sublease any real estate tothird parties.

As of* December 31, 2023,ourtwo* operating leases had a weighted average remaining lease term of 25 months and a weighted average discount rate of 5.1%. Future lease payments under operating leases as of* December 31, 2023*were as follows:

The total expense incurred related to its operating leases was $152,211 and $214,241 for the years ended* December 31, 2023and2022,* respectively, and is included in selling, general and administrative expenses on the consolidated statements of operations.

Note5. Receivables

Accounts receivable as of* December 31, 2023and2022,* consist of the following:

Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer. Unbilled receivables include short-term contract assets where billing cycles differ from calendar months, or a monthly fixed billing amount doesnot reflect the revenue earned in a given month. The accounts receivable balance as of* December 31, 2021,*was $1,664,862.

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Note6. Fair Value Measurements

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based onthree levels of inputs, of which thefirst two are considered observable and the last unobservable, that* may*be used to measure fair value which are the following:

The following table represents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of* December 31, 2023and2022:*

The following table reflects the change in fair value of our financial instruments measured at fair value on a recurring basis based on Level3 inputs:

Money market funds are highly liquid investments and are included in cash and cash equivalents on the consolidated balance sheets. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level1 of the fair value hierarchy. See Note2 for a discussion of the fair value of contingent consideration.

The carrying amounts of financial instruments such as accounts receivable and accounts payable approximate the related fair value due to the short-term maturities of these instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

There wereno gains or losses on assets measured at fair value on a nonrecurring basis in2023. The following table is a summary of losses on assets measured at fair value on a nonrecurring basis in2022, which are included in loss from discontinued operations on the consolidated statement of operations:

F-15

During thethird quarter of2022, our Gray Matters reporting unit, which was the same as our former Blockchain SCM operating segment, experienced delays in receiving approval from its government customer of certain milestone achievements specified in our contract with that customer. This delay, in turn, resulted in a decline in the reporting unit’s estimated future cash flows. Accordingly, we performed an interim goodwill impairment test as of* September 30, 2022,prior to our annual impairment test and the estimated fair value of the Gray Matters reporting unit was determined to be lower than its carrying value. In thethird* quarter of2022, we recorded a non-cash pre-tax and after-tax charge of $2,254,624 to impair the carrying value of this reporting unit’s goodwill.

For ourthird quarter2022 interim goodwill impairment testing, the fair value of the reporting unit was determined using an income approach based on a discounted cash flow (“DCF”) model which requires a complex series of judgments about future events and uncertainties and relies heavily on estimates of expected cash flows, an appropriate discount rate, and a terminal growth rate. Any changes in key assumptions, including failure to grow the revenue and improve the profitability of GMI, or other unanticipated events and circumstances,* mayaffect such estimates. Fair value assessments of the reporting unit are considered a Level3* measurement due to the significance of unobservable inputs developed using company specific information. The discount rate and terminal growth rate used in our2022 third quarter interim impairment test for the Gray Matters reporting unit were 22.5% and 3.0%, respectively.

On* January 18, 2023we executed a non-binding letter of intent to sell of the shares of GMI to an affiliate of the venture capital firm StealthPoint LLC (“SP”). While the Company continued to believe in the long-term commercial viability of its Blockchain SCM product, we also believed that GMI would continue to incur losses for a longer period than was originally estimated and would require additional cash investment before it could generate positive cash flow. As of December 31, 2022,*we determined that the ongoing discussions with SP and negotiations of potential value of our Gray Matters reporting unit were considered trigger events for purposes of evaluating the recoverability of that reporting unit and its associated goodwill.

The components of the consideration and methods for valuing them to determine the fair value of the Gray Matters reporting unit were as follows:

As a result of the* December 31, 2022impairment testing of the GMI reporting unit, we recorded a non-cash pre-tax charge for impairment of definite lived intangible assets of $3,649,193, which resulted in a deferred tax benefit of $910,147 and a non-cash pre-tax and after-tax charge of $4,205,544 to impair the remaining balance of goodwill, bringing the total goodwill impairment to $6,460,168 for2022.* We also recorded a non-cash pre-tax impairment charge of right of use assets of $113,722 which resulted in a deferred tax benefit of $16,116.

The Company consummated the transaction with StealthPoint on* March 17, 2023,and immediately deconsolidated GMI. See Note2.*

Note7. Property and Equipment

Property and equipment consist of the following as of* December 31:*

Depreciation and amortization expense related to property and equipment for the years ended* December 31, 2023and2022,* totaled $40,992 and $43,742, respectively.

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Note8. Intangible Assets

The following table summarizes our intangible assets as of* December 31, 2023and2022* and the changes during2023:

As of* December 31, 2023,expected amortization expense relating to purchased intangible assets for each of the nextfive* years and thereafter is as follows:

Note9. Settlement of Litigation

On* April 28, 2023,the Company and Jeffrey Gerald, the individual from whom the WaveDancer purchased all the outstanding shares of GMI, executed an agreement to settle pending litigation between them (the “Settlement Agreement”). On January 25, 2023,Gerald, as the result of the termination of his employment, filed a lawsuit against the Company forone* year’s severance of $150,000 and benefits to which he claimed he was entitled under his employment agreement with the Company. He had also claimed an anticipatory breach of the payment of $1,500,000 of deferred consideration otherwise due him on* December 10, 2023,*under the Stock Purchase Agreement between him and the Company and an anticipatory breach to release from escrow 43,648 shares of the Company’s common stock which are held in escrow for application against potential indemnity claims under the Stock Purchase Agreement.

The Company filed an answer denying Gerald’s claims. In addition, the Company filed a counterclaim seeking damages from Gerald associated with the acquisition transaction and arising under the Stock Purchase Agreement.

The principal terms of the Settlement Agreement were:

As a result of the settlement, the Company recognized a gain, net of expenses, of $1,442,468.

Note10. Revolving Line of Credit

On* September 30, 2022,the Company entered a revolving line of credit with Summit Community Bank (“Summit”) that provided for on-demand or short-term borrowings of up to $1,000,000 at a variable interest rate equal to the prime rate as published inThe Wall Street Journal*, with a minimum rate of 3.99% and a maximum rate of 20.00%, and subject to a borrowing base calculated using outstanding accounts receivable. Borrowings under the line of credit are secured by the assets of the Company. The line of credit initially expired on* May 16, 2023,after which Summit made several extensions of the expiration date, with the most recent extension being made to May 16, 2024.In connection with an extension of the expiration date of the line of credit, the maximum amount of borrowings permitted under the line was reduced to $500,000. As of December 31, 2023and2022,* there was $500,000 and $425,000 outstanding, respectively, and $0 and $575,000 of borrowing availability, respectively. The interest rate in effect as of* December 31, 2023,*was 8.5%.

As of* December 31, 2023,*the fair value of debt outstanding on our revolving line of credit approximates its carrying value due to the short term nature of the facility.

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Note11. Income Taxes

Income tax (benefit) expense for the years ended* December 31, 2023and2022* consists of the following:

The income tax (benefit) expense is at an effective rate different from the federal statutory rate due principally to the following:

Deferred Income Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows:

The Company has net operating loss carryforwards of approximately $15.4 million, of which $1.2 million will expire, if unused, between the years2024 and2037. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

The Company has analyzed its income tax positions using the criteria required by U.S. GAAP and concluded that, as of* December 31, 2023and2022,* it hasno material uncertain tax positions andno interest and penalties have been accrued. The Company has elected to recognize any estimated penalties and interest on its income tax liabilities as a component of its provision for income taxes.

Our income tax returns are subject to examination by income taxing authorities in all jurisdictions for which we file tax returns, generally forthree years after each return was filed, but extending to years from which net operating loss carryforwards are utilized to reduce current year taxes. We arenot currently under audit in any jurisdiction.

Note12. 401(k) Plans

We havetwo 401(k) Savings Plans that qualify as deferred salary arrangements under Section401(k) of the Internal Revenue Code. Under these401(k) Plans, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We recognized expense of $125,394 and $163,642 for the years ended* December 31, 2023and2022,* respectively, which is included in cost of professional fees and selling, general and administrative expenses on the consolidated statements of operations.

Note13. Stock-Based Compensation

We havethree stock-based compensation plans. The2006 Stock Incentive Plan was adopted in2006 (“2006 Plan”) and had options granted under it through* April 12, 2016.The2016* Stock Incentive Plan (“2016 Plan”) was adopted in2016 (“2016 Plan”) and had options granted under it through* November 15, 2021.On October 11, 2021,the Board of Directors approved the2021* Stock Incentive Plan (“2021 Plan”) and on* December 2, 2021,*our shareholders approved the plan.

The Company recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the awards. The fair values of option awards granted in2023 and2022 were estimated using the Black-Sholes option pricing model under the following assumptions:

Determining the assumptions for the expected term and volatility requires management to exercise significant judgment. The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company doesnot have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility to that of several public company issuers that operate within its market segment. The guideline companies’ volatility was increased by a size adjustment premium to compensate for the difference in size between the guideline companies and the Company in its calculation.

2021 Stock Incentive Plan

The2021 Plan became effective* October 11, 2021and expires October 11, 2031.The2021* Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards* maybe granted under the2021* Plan is 500,000. Options under the2021 Plan expireno later thanten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The minimum exercise price of each option is the fair market value of the Company’s stock on the date of grant. Under the Plan, fair market value means the average of the reported high and low sale prices of our common stock on the Nasdaq Stock Market. As of* December 31, 2023and2022,* there were 330,700 and 350,700, respectively, of outstanding unexpired options issued under the2021 Plan, of which 169,520 and 129,500, respectively, were exercisable, and there were 60,800 and 145,800, respectively, options available to be granted.

2016 Stock Incentive Plan

The2016 Plan became effective* June 1, 2016,and expires April 4, 2026.The2016* Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards* maybe granted under the2016* Plan is 1,000,000. Options under the2016 Plan expireno later thanten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vest over periods determined by the Board of Directors. The minimum exercise price of each option is the quoted market price of the Company’s stock on the date of the grant. As of* December 31, 2023and2022,* there were 53,100 and 77,350 options, respectively, of outstanding unexpired options under the2016 Plan, of which 47,850 and 62,975 were exercisable, respectively.No additional options* maybe granted under the2016* Plan.

2006 Stock Incentive Plan

The2006 Plan became effective* May 18, 2006,and expired April 12, 2016.The2006* Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards could be granted under the2006 Plan was 195,000. Options under the2006 Plan expireno later thanten years from the date of grant or after prescribed periods of time after employment ceases, whichever comes first, and vested over periods determined by the Board of Directors. There were 7,200 and 27,200 outstanding unexpired options remaining from the2006 Plan as of* December 31, 2023and2022,* respectively, all of which were exercisable.

The status of the options issued under the foregoing option plans as of* December 31, 2023and2022,* and changes during the years then ended were as follows:

The total intrinsic value of options exercised in the years ended* December 31, 2023and2022* was $610 and $756,888, respectively.

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Nonvested stock option awards as of* December 31, 2023and2022,* and changes during the years then ended were as follows:

As of* December 31, 2023,*unrecognized compensation cost associated with non-vested share-based employee and non-employee compensation totaled $329,622, which is expected to be recognized over a weighted average period of 16 months.

Note14. Common Stock Purchase Agreement

On* July 8, 2022,we entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Purchase Agreement, subject to certain limitations and conditions, the Company has the right, butnot* the obligation, to sell to B. Riley up to $15,000,000 of shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), from time to time. Sales of Common Stock to B. Riley under the Purchase Agreement, and the timing of any such sales, are solely at the Company’s option, and the Company is underno obligation to sell any securities to B. Riley under the Purchase Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities Exchange Commission (the “SEC”) to register under the Securities Act of1933, as amended (the “Securities Act”) the resale by B. Riley of up to 4,500,000 shares of Common Stock that the Company* mayissue or elect, in the Company’s sole discretion, to issue and sell to B. Riley, from time to time under the Purchase Agreement. We issued 119,780 common shares valued at $150,000 to B. Riley as a commitment fee. The cost of the shares was charged to additional paid in capital during thetwelve* months ended* December**31,* 2023.

During thetwelve months ended* December31,* 2023, the Company sold 27,429 shares of common stock under the Purchase Agreement at an average price of $6.30 per share, net of fees of approximately $0.30 per share. The net proceeds from these sales were $172,108. There wereno sales under the Purchase Agreement during thetwelve months ended* December31,* 2022.

Note15. Private Offerings of Common Stock

On* September**29,* 2023, the Company sold 35,000 unregistered shares of its common stock to G. James Benoit, Jr., its chairman and chief executive officer, in a private offering at a price of $5.00 per share from which it raised $175,000 of immediately available cash proceeds.

In* August 2022*the Company sold 157,256 unregistered shares of its common stock in a private offering at a price of $12.00 per share from which it raised $1,887,000 of immediately available cash proceeds, including $600,000 from Mr. Benoit for 50,000 shares at $12.00 per share.

The total offering costs associated with the sales of unregistered shares of common stock in2023 and2022 werenot material.

The shares in the private offering transactions in* Septemberof2023* and* Augustof2022* were unregistered and subject to a holding period of up toone year under SEC Rule144 before the securities are able to be sold in the public market.

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Note16. Loss Per Share

Basic loss per share excludes dilution and is computed by dividing the loss attributable to common shareholders by the weighted-average number of shares outstanding for the period. Diluted (loss) income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss, because the inclusion of such items would be antidilutive. The antidilutive effect of 30,946 and 84,173 shares from stock options, andzero and 7,538 shares from warrants were excluded from diluted shares for the years ended* December 31, 2023and2022,* respectively.

Note17. Financial Statement Captions

The following table summarizes the Company’s prepaid expenses and other current assets as of* December 31, 2023and2022:*

The following table summarizes the Company’s other current liabilities as of* December 31, 2023and2022:*

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EXHIBIT INDEX

• Management contract, compensatory plan or arrangement.

• Filed herewith.

** Furnished herewith.