FIREFLY NEUROSCIENCE INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 was historically in the business of developing and maintaining information technology (“IT”) systems, modernizing client information systems, and performing other IT-related professional services to government and commercial organizations.

On* 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 through2023.* Unless otherwise noted, all amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations. See Note2 for further information about the sale transaction, the deconsolidation of GMI, and treatment of GMI as a discontinued operation. On* August 9, 2023,*the Company sold its remaining equity interest in GMDC.

Prior to* March 17,2023, we hadtwo operating segments: Tellenger and Blockchain SCM. Following the sale of GMI, which comprised all of the material operations of the Blockchain SCM segment, it was presented as a discontinued operation (see Note2), and the Blockchain SCM segment ceased to exist. After March 17, 2023,*the Company managed its business asone reportable operating segment.

In connection with and prior to the consummation of the Merger (as defined and further described below), pursuant to the previously announced Stock Purchase Agreement, dated as of* November 15, 2023,*by and among the Company, Wavetop Solutions, Inc. (“Wavetop”) and Tellenger, Inc. (“Tellenger”), Wavetop purchased from the Company all of the issued and outstanding shares of common stock, par value $1.00 per share, of Tellenger prior to the merger, for an aggregate purchase price of $1.5 million, plus the assumption of the employment agreements that WaveDancer was obligated under with G. James Benoit, Jr., Gwen Pal and Stan Reese, which included provisions to pay severance under certain circumstances. The purchase price was paid in full in cash less the outstanding balance of WaveDancer’s $500,000 credit facility with Summit Commercial Bank, N.A. (“SCB”). The balance of the credit facility at SCB was paid in full concurrent with the close of the Merger.

Agreement and Plan of Merger

On* August 12, 2024,pursuant to the previously announced Agreement and Plan of Merger, dated as of November 15, 2023 (as amended by that certain AmendmentNo.* 1, dated as of* January 12, 2024,and that certain AmendmentNo.* 2, dated as of* June 17, 2024,“Merger Agreement”), by and among the Company, its wholly owned subsidiary, FFN Merger Sub, Inc., a Delaware corporation (“FFN”), and Firefly Neuroscience2023,* Inc., a Delaware corporation (formerly known as Firefly Neuroscience, Inc., “Firefly2023”), FFN merged with and into Firefly2023, with Firefly2023 surviving as a wholly owned subsidiary of Firefly (the “Merger”). At the effective time of the Merger (the Closing”), each holder of outstanding shares of Firefly2023’s common stock, par value $0.00001 per share (the “Firefly2023 Common Stock”) received the number of shares of common stock, par value $0.0001 per share, of the Company (the “New Firefly Common Stock”) equal to the number of shares of Firefly2023 Common Stock such stockholders held multiplied by the exchange ratio, or an aggregate of 7,870,251 shares of Firefly common stock at Closing using an exchange ratio (the “Exchange Ratio”) of 0.1040. Additionally, upon at the effective time of the Merger: (i) each outstanding option to purchase Firefly2023 Common Stock that wasnot exercised prior to the Closing was assumed by the Company subject to certain terms contained in the Merger Agreement and became an option to purchase shares of New Firefly Common Stock, subject to adjustment to give effect to the Exchange Ratio, (ii) each outstanding Firefly2023 restricted share unit outstanding immediately prior to the Closing was accelerated and vested pursuant to the terms thereof, and (iii) each outstanding warrant to purchase shares of Firefly2023 Common Stock that wasnot exercised prior to the Closing was assumed by the Company, subject to certain terms contained in the Merger Agreement.

Immediately prior to the Closing of the Merger, on* August 12, 2024, (i) (A) pursuant to the Amended and Restated Certificate of Incorporation of WaveDancer, Inc., WaveDancer changed its name to Firefly Neuroscience, Inc., and (B) pursuant to an amendment to its Certificate of Incorporation, Firefly2023* changed its name to Firefly Neuroscience2023, Inc. and (ii) Firefly effected a reverse stock split of all of the then issued and outstanding shares of Firefly’s common stock (“Firefly Common Stock) at a ratio of1-for-3 (“Merger Reverse Stock Split”). As a result of the Merger Reverse Stock Split, everythree (3) shares of the then issued and outstanding Firefly Common Stock were automatically combined intoone (1) issued and outstanding share of Firefly Common Stock, without any change in the par value per share or the number of authorized shares of common stock.

Following the Closing, there are 7,870,251 shares of New Firefly Common Stock outstanding, with former Firefly2023 stockholders owning approximately 92% and former Firefly stockholders owning 8% of the Company’s outstanding securities.

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Following the consummation of the Merger (as defined below), the business of Firefly2023 became the business of the Company, as described below.

Firefly Business

Firefly is an Artificial Intelligence (“AI”) technology company developing innovative neuroscientific solutions that improve outcomes for patients with mental illnesses and neurological disorders. Its FDA-510(k) cleared Brain Network Analytics software platform (the “BNA Platform”) and is focused on advancing diagnostic and treatment approaches for people suffering from mental illnesses and cognitive disorders, including depression, dementia, anxiety disorders, concussions, and attention-deficit/hyperactivity disorder.

Liquidity and Going Concern

During thesix months ended* June 30, 2024*, the Company generated an operating loss from continuing operations of $1,056,041. As of* June 30, 2024*, the Company had a net working capital deficit of $746,040 including cash and cash equivalents of $244,137. Under existing operating conditions, we estimate that over thetwelve months from the date of these financial statements our operating activities* mayuse as much as $1.0 million to $1.5 million of cash, including the satisfaction of all existing liabilities. The Company's line of credit balance as of June 30, 2024*, was $300,000, hadno additional borrowing capacity, and expired on* July 16, 2024.These factors raise substantial doubt about our ability to continue as a going concern for at least the nexttwelve* months from the date of filing.

The business of Firefly2023 had negative cash flow from operating activities for thesix months ended* June 30, 2024and2023,* as disclosed in the Company's Current Report on Form8-K filed* August 14, 2024.Further, Firefly2023* has had recurring losses with minimal revenue from operations. While the Company is attempting to raise funds for commercialization, Firefly2023's monthly cash requirements during thesix months ended* June 30, 2024had been met through issuance of shares to new and existing shareholders. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company may*be unable to realize its assets and discharge its liabilities in normal course of business. To strengthen the Company’s liquidity in the foreseeable future, the Company has taken the following measures:

Management of the Company has a reasonable expectation that the Company can continue raising additional equity capital to continue in operational existence for the foreseeable future.

The accompanying unaudited condensed 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 unaudited condensed consolidated financial statements donot include any adjustment that might result from the outcome of this uncertainty.

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Reverse Stock Splits

On* August 12, 2024,*in connection with the Merger, the Company effected the Merger Reverse Stock Split. The Merger 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 condensed consolidated financial statements and accompanying notes have been retroactively adjusted to give effect to the Merger Reverse Stock Split. Following the Merger Reverse Stock Split, the Company’s issued and outstanding shares of Common Stock decreased from 2,180,485 issued and 2,013,180 outstanding pre-split shares, respectively, to approximately 729,829 issued and 671,060 outstanding post-split shares, before finalizing the rounding of fractional shares. As a result of the Merger Reverse Stock Split, the exercise prices of the outstanding options and warrants were increased by a factor of three.

Certain amounts presented in the2023 unaudited condensed consolidated financial statements, including common stock, additional paid-in capital, and shares and per share data have been retroactively adjusted for the Merger Reverse Stock Split and the Reverse Stock Split to conform to the current period financial statement presentation.

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form10-Q and Article8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair andnot misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended* December 31, 2023*, included in the Annual Report on Form10-K filed by the Company with the SEC on* March 20, 2024 (the “Annual Report”), as amended. The accompanying December 31, 2023*, condensed consolidated balance sheet was derived from the audited financial statements included in the Annual Report but doesnot include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for any interim periods arenot necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

The unaudited condensed consolidated financial statements as of and for thethree andsix months ended* June 30, 2024*, include the accounts of WaveDancer and its condensed consolidated subsidiaries (collectively, the “Company”, “we” or “our”). All significant intercompany transactions and balances have been eliminated in consolidation.

There have beenno changes in the Company’s significant accounting policies as of* June 30, 2024*, as compared to the significant accounting policies disclosed in Note1, "Summary of Significant Accounting Policies" in the Company's Annual Report.

Equity Method Investments

The Company has accounted 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 unaudited condensed consolidated statements of operations using the most recently available earnings data at the end of the period.

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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. See Note2* for further information about the sale transaction, the deconsolidation of GMI, and the treatment of GMI as a discontinued operation. The Company accounted for its investment in GMDC in accordance with the equity method from* March 17, 2023,through August 9, 2023.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. Since August 9, 2023,*the Company hasno equity investment in GMDC nor any other equity exposure to the GMI business.

Use of Estimates

Preparation of condensed 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, intangible assets, and goodwill, including the underlying estimates of cash flows of our products and reporting unit; useful lives of intangible assets and property and equipment; the valuation of stock-based compensation, and the valuation of deferred tax assets and 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.

Concentration of Credit Risk

During thethree months ended* June 30, 2024*, the Company’s prime contracts with U.S. government agencies represented 7.1%of revenue and subcontracts under federal procurements represented 92.9% of revenue. The terms of these contracts and subcontracts vary from single transactions tofive years. Three subcontracts under federal procurements represented 30.0%,23.5%, and 17.4% of revenue, respectively. Revenue fromone prime contractor under which the Company has multiple subcontracts represented 61.2% of the Company’s revenue in aggregate.

During thethree months ended* June 30, 2023*, the Company’s prime contracts with U.S. government agencies represented 10.2% of revenue and subcontracts under federal procurements represented 89.7% of revenue, and 0.1% of revenue came from commercial contracts. The terms of these contracts and subcontracts vary from single transactions tofive years. Three subcontracts under federal procurements represented 30.5%,19.3%, and 17.5% of revenue, respectively. Revenue fromone prime contractor under which the Company has multiple subcontracts represented 55.1% of the Company’s revenue in aggregate.

During thesix months ended* June 30, 2024*, the Company’s prime contracts with U.S. government agencies represented 8.0% of revenue and subcontracts under federal procurements represented 92.0% of revenue. The terms of these contracts and subcontracts vary from single transactions tofive years. Three subcontracts under federal procurements represented 29.5%,23.3%, and17.2% of revenue, respectively. Revenue fromone prime contractor under which the Company has multiple subcontracts represented60.0% of the Company’s revenue in aggregate.

During thesix months ended* June 30, 2023*, the Company’s prime contracts with U.S. government agencies represented 9.1% of revenue and subcontracts under federal procurements represented 89.3% of revenue, and 1.6% of revenue came from commercial contracts. The terms of these contracts and subcontracts vary from single transactions tofive years. Three subcontracts under federal procurements represented 30.3%,21.1%, and 16.6% of revenue, respectively. Revenue fromone prime contractor under which the Company has multiple subcontracts represented 54.5% of the Company’s revenue in aggregate.

As of* June 30, 2024*, the Company’s accounts receivable included receivables from three subcontracts under federal procurements that represented 22.5%,24.8%, and 14.9% of the Company’s outstanding accounts receivable, respectively. Receivables fromone prime contractor under which the Company has multiple subcontracts represented 52.9% of the Company’s outstanding accounts receivable in aggregate.

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.

On* March 17, 2023,the Company entered into and closed a Stock Purchase Agreement with GMDC, a company newly formed by StealthPoint LLC, 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. Payments were to be calculated for each calendar year and were due by March 31of the following year. 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 were $65,000 which was paid by GMDC at closing and wasnot subject to adjustment.

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The $65,000 prepayment was included in other accrued liabilities on the unaudited condensed consolidated balance sheet as of* March 31, 2023,and was amortized as a reduction to selling, general and administrative expenses ratably over thethree*-month period ending* 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 a later preferred stock financing round. The Company recognized a gain on the sale of GMI of $100,615 in thefirst quarter of2023, which was included in net loss on discontinued operations in the unaudited condensed consolidated statement of operations, and immediately deconsolidated GMI 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, GMI and GMDC were related parties of the Company until the* August 9, 2023,*sale of our equity interest in GMDC. The Company's current and future rights with regard to GMDC terminated with the sale of the equity interest.

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, 2023and 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 (see Note5*).

The following table sets forth details of net earnings from discontinued operations for thesix months ended* June 30, 2024and2023*, which reflects the results of the Blockchain SCM operating segment through the date our controlling financial interest in it was sold –* March 17, 2023 (See Note1*).

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During thesix months ended* June 30, 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 unvested options, was taken back into income in* March 2023.*

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, and sales ofthird-party support and maintenance contracts based on those software products. 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 are 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.

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.

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Disaggregation of Revenue from Contracts with Customers

Contract Balances

Accounts Receivable

Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. There wereno such allowances recognized as of* June 30, 2024* and* December 31, 2023*.

Accounts receivable as of* June 30, 2024* and* December 31, 2023*, 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.

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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 are as follows:

Revenues recognized during thethree months ended* June 30, 2024and2023*, from the balances as of* December 31, 2023* and2022, were $31,237 and $55,665, respectively. Revenues recognized during thesix months ended* June 30, 2024and2023*, from the balances as of* December 31, 2023* and2022, were $85,035 and $110,753, respectively.

Deferred Costs of Revenue

Deferred costs of revenue consist of the costs ofthird-party support and maintenance contracts for enterprise server-based software. These costs are reported under the prepaid expenses and other current assets caption on the Company’s condensed 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 for thethree andsix months ended* June 30, 2024* are as follows:

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The Company hastwo significant operating leases,one for its headquarters offices in Fairfax, Virginia (the "Fairfax Lease") andone for additional office space in Annapolis, Maryland. The leases both commenced in2021 and had 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. In* February 2024,the Company gave notice of exercise of a termination option of the Fairfax Lease effective November 30, 2024*for a fee equivalent totwo months rent, in accordance with lease terms. Under lease modification standards, the Company reassessed the Fairfax Lease, resulting in the derecognition of the related lease asset of $165,721 and lease liabilities of $172,140 on the Company's condensed consolidated balance sheets and a gain on lease termination of $6,419 as presented on the Company's condensed consolidated statements of operations.

As of* June 30, 2024* and* December 31, 2023*, the Company doesnot have any sales-type or direct financing leases.

Each of the Company’s operating lease assets represent its right to use an underlying asset for the lease term and the related lease liability represents its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date, subject to reassessment upon the material modification of a lease, based on the present value of lease payments over the lease term. Since the leases donot provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement dates or lease modification dates in determining the present value of lease payments. The operating lease assets also include any lease payments made and exclude lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreements include rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liabilities and operating lease assets. 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* June 30, 2024*, our remaining operating lease had a weighted average remaining lease term of 4 months and a weighted average discount rate of 4.5%. Future lease payments under operating leases as of* June 30, 2024*, were as follows:

The total expense incurred related to its operating leases was $37,106 and $38,053 for thethree months ended* June 30, 2024and2023*, respectively, and $75,825 and $76,106 for thesix months ended* June 30, 2024and2023* and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

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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 presents the fair value hierarchy for the Company’s financial instruments measured at fair value on a recurring basis as of* June 30, 2024* and* December 31, 2023*:

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.

As discussed in Note2 above, in connection with its sale of GMI, the Company received contingent consideration that required GMDC to make annual payments equal tofive percent (5%) of the purchaser’s GAAP based revenue through* December 31, 2029,up to a cumulative maximum of $4,000,000, attributable to the purchaser’s blockchain-enabled digital supply chain management platform and associated technologies. The fair value of the contingent consideration was estimated based on GMDC’s forecast of revenue, the estimated after-tax payments to the Company, and the present value of the after-tax payments based on discount rate that reflects the risk of achieving the timing and amounts of forecasted payments. The significant inputs utilized in estimating the fair value of contingent consideration include the forecast of revenues, the income tax rate of 27.0 percent, and the discount rate of 40.75 percent. On August 9, 2023,*the Company and GMDC agreed to terminate all rights and obligations with respect to the calculation and payment of future contingent payments from GMDC to the Company in exchange for the payment of $1,000,000 cash by GMDC to the Company, resulting in a gain of $318,000.

There wereno assets requiring Level3 fair value measurements as of* June 30, 2024* and* December 31, 2023*.

There wereno unrealized gains or losses recognized in income for thethree- orsix-month periods ended* June 30, 2024and2023*.

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Information regarding our intangible assets is as follows:

As of* June 30, 2024*, expected amortization expense relating to purchased intangible assets for each of the nextfive years and thereafter is as follows:

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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 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 the2021* Plan.

The Company recognizes compensation costs on a straight-line basis over the service period of the awards.

There wereno option awards granted in thesix months ended* June 30, 2024and2023*. There wereno options exercised during thethree months ended* June 30, 2024and2023*, respectively, andzero and 667 options exercised during thesix months ended* June 30, 2024and2023*. As of* June 30, 2024*, there was $162,308 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plans; that cost is expected to be recognized over a weighted-average period of 11 months.

Total compensation expense related to these plans was $60,216 and $88,159 for thethree months ended* June 30, 2024and2023*, respectively, and $173,996 and $376,331 for thesix months ended* June 30, 2024and2023*, respectively, and is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

On* September 30, 2022,the Company entered a revolving line of credit with Summit Community Bank 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. This line of credit expired on* August 16, 2023.*

On* September 11, 2023,the Company and SCB entered a new line of credit agreement with the same terms as the preceding agreement, except that the maximum availability under the new line was reduced from $1,000,000 to $500,000. There wereno* borrowings and $200,000 of repayments during thesix months ended* June 30, 2024*. As of* June 30, 2024*, there was $300,000 outstanding andno borrowing availability under this line of credit. The line of credit expired on* July 16, 2024.On August 12, 2024,*upon the close of the Merger, the lender was repaid in full.

As of* June 30, 2024,*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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On* July 8, 2022,we entered into a Common Stock Purchase Agreement (the “Purchase Agreement” or "ELOC") 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 $0.0001 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 150,000 shares of Common Stock that the Company* may*issue or elect, in the Company’s sole discretion, to issue and sell to B. Riley, from time to time under the Purchase Agreement. Use of the ELOC is subject to restrictions based on the price and trading volume of our stock, which limits its availability to the Company as a significant source of capital.

During thethree andsix months ended* June 30, 2024*, the Company hadno sales of shares of common stock. During thethree months ended* June 30, 2023*, the Company hadno sales of shares of common stock, and during thesix months ended* June 30, 2023*, the Company sold 2,479 shares of common stock under the ELOC at an average price of $21.56 per share, net of fees of approximately $1.20 per share. The net proceeds from this sale were $53,453.

For thethree andsix months ended* June 30, 2024*, the Company’s effective tax rate was 0%. The difference between the statutory tax rate and the effective tax rate for thethree andsix months ended* June 30, 2024*, is primarily driven by the presence of a full valuation allowance against all deferred tax assets.

Basic loss per share excludes dilution and is computed by dividing the loss available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings (loss) 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 effects of 913 shares from stock options andzero shares from warrants were excluded from diluted shares for thethree months ended* June 30, 2024*, respectively. The antidilutive effects of 1,309 shares from stock options andzero shares from warrants, and 6,504 shares from stock options andzero shares from warrants, were excluded from diluted shares for thesix months ended* June 30, 2024and2023*, respectively.

Reverse Merger with Firefly

On* August 12,the Company consummated its previously announced Merger with Firefly2023,* pursuant to which each holder of outstanding shares of Firefly2023 Common Stock received the number of shares of New Firefly Common Stock equal to the number of shares of Firefly2023 Common Stock such stockholders held multiplied by the exchange ratio, or an aggregate of 7,870,251 shares of Firefly common stock at Closing using the Exchange Ratio. Additionally, upon at the effective time of the Merger: (i) each outstanding option to purchase Firefly2023 Common Stock that wasnot exercised prior to the Closing was assumed by the Company subject to certain terms contained in the Merger Agreement and became an option to purchase shares of New Firefly Common Stock, subject to adjustment to give effect to the Exchange Ratio, (ii) each outstanding Firefly2023 restricted share unit outstanding immediately prior to the Closing was accelerated and vested pursuant to the terms thereof, and (iii) each outstanding warrant to purchase shares of Firefly2023 Common Stock that wasnot exercised prior to the Closing was assumed by the Company, subject to certain terms contained in the Merger Agreement.

Immediately prior to the Closing of the Merger, on* August 12, 2024, (i) (A) pursuant to the Amended and Restated Certificate of Incorporation of WaveDancer, Inc., WaveDancer changed its name to Firefly Neuroscience, Inc., and (B) pursuant to an amendment to its Certificate of Incorporation, Firefly2023* changed its name to Firefly Neuroscience2023, Inc. and (ii) Firefly effected a reverse stock split of all of the then issued and outstanding shares of Firefly Common Stock at a ratio of1-for-3. As a result of the Merger Reverse Stock Split, everythree (3) shares of the then issued and outstanding Firefly Common Stock were automatically combined intoone (1) issued and outstanding share of Firefly Common Stock, without any change in the par value per share or the number of authorized shares of common stock.

Private Placement

As previously reported, on* July 26, 2024,Firefly2023* entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors, pursuant to which Firefly2023 agreed to issue and sell (i) shares of Firefly2023 Common Stock (the "PIPE Shares") or, to the extent that such purchase of PIPE Shares would result in the investors, together with their affiliates and certain related parties, beneficially owning more than 4.99% of the outstanding shares of the Company immediately following the consummation of the Merger, pre-funded warrants (the “Pre-Funded Warrants”) to purchase such PIPE Shares in excess of 4.99% of the outstanding shares of the Company’s common stock, and (ii) warrants (the “Warrants”) to purchase shares of Firefly2023 Common Stock in a private placement (the “Private Placement”) for aggregate gross proceeds of approximately $3.5 million, before deducting estimated offering expenses payable by Firefly2023. The purchase price of each PIPE Share and accompanying Warrant was $1.326 and the purchase price of each Pre-Funded Warrant and accompanying Warrant was $1.3257. The Private Placement closed on* August 12, 2024,*substantially contemporaneous with the consummation of the Merger.

None of the issuances of the PIPE Shares, the Pre-Funded Warrants, the Warrants, or the shares of the Company’s common stock issuable upon exercise of the Pre-Funded Warrants and the Warrants (collectively, the “Warrant Shares”) were registered under the Securities Act of1933, as amended (the “Securities Act”), or any state securities laws. The PIPE Shares, the Pre-Funded Warrants, the Warrants and the Warrant Shares have been and will be, as applicable, issued in reliance on the exemptions from registration provided by Section4(a)(2) under the Securities Act and/or Regulation D promulgated thereunder. The investors that entered into to a Purchase Agreement represented that they accredited investors, as defined in Rule501 of Regulation D promulgated under the Securities Act.

Tellenger Sale

In connection with and prior to the consummation of the Merger, pursuant to the previously announced Stock Purchase Agreement, dated as of* November 15, 2023,by and among the Company, Wavetop and Tellenger, Wavetop purchased from the Company all of the issued and outstanding shares of common stock, par value $1.00 per share, of Tellenger prior to the merger, for an aggregate purchase price of $1.5 million, plus the assumption of the employment agreements that WaveDancer was obligated under with G. James Benoit, Jr., Gwen Pal and Stan Reese, which included provisions to pay severance under certain circumstances. The purchase price was paid in full in cash less the outstanding balance of $300,000 under WaveDancer’s $500,000 credit facility with Summit Commercial Bank, N.A.. The balance of the credit facility at SCB was paid in full concurrent with the close of the Merger. Following the sale of Tellenger and the consummation of the Merger, the business of Firefly2023* became the business of the Company.

Working Capital Letter Agreement

On* July 23, 2024,Firefly2023* advanced $75,000 cash in working capital to WaveDancer under a letter agreement. The letter agreement established that the advance would be repaid upon the close of the Merger. WaveDancer had sufficient funds after paying all of its other specific liabilities. The advance wasnot repaid, but was considered in the calculation of the Exchange Ratio.