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Note 4 - Business Combination
 6 Months Ended
Jun. 30, 2025
Notes to Financial Statements  
Business Combination [Text Block]

NOTE 4: BUSINESS COMBINATION 

 

Evoke Neuroscience, Inc.

 

On April 30, 2025, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Evoke Neuroscience, Inc. (“Evoke”) and stockholders of Evoke (the “Sellers”) to increase Firefly Neuroscience, Inc.'s capacity and expand its customer base. The Sellers sold and the Company purchased all of the issued and outstanding shares of Evoke, for a total purchase price consisting of: (i) $3,000 in cash (the “Cash Purchase Price”); (ii) shares of the Company’s common stock having an aggregate value of $3,000 priced at $3.50 per share (the “Shares”); and (iii) an earn-out payment in the form of additional shares of the Company’s common stock with an aggregate value of $500, contingent upon the achievement of specified revenue targets during a thirty-six (36) month earn-out period, all as further described in the Securities Purchase Agreement (the “Earn-Out Shares,” and collectively with the Cash Purchase Price and Share Consideration, the “Purchase Price”).

 

Each Seller agreed not to sell, transfer, or otherwise dispose of any Shares, or engage in any transaction that would transfer the economic benefits of the Shares during the Lock-Up Period (the “Lock-Up Period”) without the prior written consent of the Company. The Lock-Up Period began on the closing date and will end on the earlier of (a) six months after the closing date or (b) the effective date of a registration statement filed by the Company with the SEC covering the resale of the Shares.

 

In addition, if the estimated working capital is below $90 (“Minimum Working Capital Threshold”), the Purchase Price shall be reduced by the shortfall, though no increase would occur if the working capital exceeds the Minimum Working Capital Threshold. Additionally, $150 of the Cash Purchase Price were wired directly to Evoke to fund post-closing operational expenses (“Operational Expense Amount”), and the Operational Expense Amount shall be excluded from calculating the Closing Working Capital (as defined in the Securities Purchase Agreement), the Minimum Working Capital Threshold, and the Final Closing Statement. Within 90 days after closing, the Company will provide a final closing statement with the actual figures prepared in good faith.

 

The transactions contemplated under the Securities Purchase Agreement were closed on May 1, 2025, which were subject to customary closing conditions, including, without limitation, the completion of mutually satisfactory due diligence; compliance with applicable regulatory requirements; the Company entering into a satisfactory consulting agreement with David W. Hagedorn; Evoke having no outstanding debt or liabilities in default; the receipt of any required shareholder approvals; and the delivery of evidence of debt payoff from the Company’s loan holders.

 

The aggregate purchase price was $6,221, which consisted of: (a) $3,000 in cash; (b) 857,142 shares of Company common stock with an acquisition date fair value of $2,743; and (c) a liability associated with the Earn-Out Shares with an acquisition date fair value of $478, subject to the conditions described above. 

 

The Company engaged a third-party independent valuation specialist to assist in the determination of fair values of tangible and intangible assets acquired and liabilities assumed for Evoke. The final determination of the fair value of assets and liabilities will be completed within the one-year measurement period as required by ASC 805. The acquisition will necessitate the use of this measurement period to adequately analyze and assess the factors used in establishing the asset and liability fair values as of the relevant acquisition date.

 

The allocation of the purchase price has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available.

The primary areas of the purchase price that are not yet finalized are related to the valuation of, Developed technologies, Trade names, Non-compete agreements, Customer lists, Deferred revenues, and Goodwill.

 

  

Purchase Price

Allocation

 

Purchase Consideration:

    

Cash

 $3,000 

Common stock

  2,743 

Earn-Out Shares

  478 
     

Total Purchase Consideration

 $6,221 
     

Less:

    

Developed technology

 $700 

Trade name

  150 

Non-compete agreements

  110 

Working capital

  139 

Security deposit

  3 

Deferred revenue, non-current portion

  (56)
     

Fair Value of Identified Net Assets

 $1,046 
     

Goodwill

 $5,175 

 

In connection with the acquisition of Evoke, the Company acquired intangible assets in the form of developed technology, a trade name and non-compete agreements. The Company used the relief from royalty method when determining the fair value of the acquired trade name and developed technology. The fair value was determined by applying an estimated royalty rate to revenues, measuring the value the Company would pay in royalties to a market participant if it did not own the trade name and developed technology and had to license it from a third party. The trade name was assigned a useful life of 3 years and the internally developed technology was assigned a useful life of 9 years. The Company used the postulated loss of income method when determining the fair value of the non-compete agreements. The non-compete agreements were assigned a contractual useful life of 5 years. Significant assumptions included a discount rate of 15%, royalty rates of 3.5% and an assumed income tax rate of 26.5%.

 

The fair value of working capital accounts was determined to be their carrying values due to the short-term nature of the assets and liabilities.

 

The contingent consideration associated with the Earn-Out Shares of $478 reflects the estimated fair value, at the acquisition date, of contingent future cash payments of up to $500 to the Sellers under an “earn-out” provision of the Securities Purchase Agreement. The Company determined the estimated acquisition date of fair value of the contingent consideration using a Monte Carlo simulation. Significant assumptions included a discount rate of 3.5% and an assumed income tax rate of 26.5% as well as projected net sales derived from internal forecasts and a three month revenue volatility rate of 1.6%.

 

This contingent consideration liability will be remeasured at fair value each reporting period until the contingency is resolved, with changes in fair value recognized in operating expenses. During the three months ended June 30, 2025, the Company recognized a loss on change in fair value of contingent consideration of $3. Significant assumptions included a discount rate of 3.6% and an assumed income tax rate of 26.5% as well as projected net sales derived from internal forecasts and a three-month revenue volatility rate of 2.4%.

 

The components of working capital are as follows:

 

Current assets:

    

Cash

 $599 

Accounts receivable, net

  45 

Inventory

  104 
     

Total current assets

 $748 
     

Less current liabilities:

    

Accounts payable

 $280 

Accrued expenses and other current liabilities

  137 

Deferred revenue

  192 
     

Total current liabilities

 $609 
     

Net working capital

 $139 

 

Goodwill was recorded based on the amount by which the purchase price exceeded the fair value of the net assets acquired and the amount is attributable to the reputation of the business acquired, the workforce in place and the synergies to be achieved from this acquisition. Goodwill of $5,175 from the acquisition of Evoke is not expected to be deductible for income tax purposes.

 

The condensed consolidated financial statements of the Company include the results of operations of Evoke from April 30, 2025 to June 30, 2025 and do not include results of operations for periods prior to April 30, 2025. The results of operations of Evoke from April 30, 2025 to June 30, 2025 included revenues of $251 and a net loss of $12.

 

The following table presents the unaudited pro forma condensed consolidated results of operations for the three and six months ended June 30, 2025 and 2024 as if the acquisition of Evoke occurred at the beginning of fiscal year 2024. The pro forma information provided below is compiled from the preacquisition financial information of Evoke and includes pro forma adjustments to give effect to (i) amortization expense associated with the acquired intangible assets. The pro forma results are not necessarily indicative of (i) the results of operations that would have occurred had the operations of this acquisition actually been acquired at the beginning of fiscal year 2024 or (ii) future results of operations.

 

  

For the Three Months Ended
June 30,

  

For the Six Months Ended
June 30,

 
  

2025

  

2024

  

2025

  

2024

 
                 

Revenues

 $408  $2,474  $856  $4,867 

Net loss

 $(1,857) $(452) $(15,019) $(1,206)

 

As of the date of the acquisition, the Company expected to collect all contractual cash flows related to receivables acquired in the acquisition. Acquisition-related costs of $50 were expensed as incurred and are recorded within general and administrative expenses on the condensed consolidated statements of operations.